Brexit: separating pension fact from fiction

The stakes could not be higher ahead of the EU referendum on 23rd June. It’s therefore unsurprising to see the claims and counter claims of both the Leave and Remain camps ramping up as the vote draws ever closer.

But how much can you actually believe from these fighting cabals of desperate politicians and campaigners? Let’s have a look at some of the claims that have been made about the impact of leaving the EU – and whether they hold water.

Claim 1: Your state pension will be £137 a year lower if we leave the EU

The above prediction was made by the Treasury in one of several documents highlighting the risks of a Brexit.

The most important thing to remember as you go to the ballot box is nothing is certain. However, economists are agreed that a Leave vote is likely to have a number of short-term implications.

The value of sterling is expected to slide given the uncertainty caused by the lengthy exit process and subsequent trade negotiations. This would probably cause a rise in exports and a fall in imports, pushing up inflation.

The Treasury’s guess that state pensions will be £137 lower in real terms by 2017/18 is based on an assumption that inflation will be 2.2% in the event of a Brexit, significantly higher than the Office for Budget Responsibility’s expectation under a no-change scenario of 0.6%.

Even if this did happen, pensioners would not be worse off as their pension would rise by at least 2.5% through the triple-lock – they’d just be less better off!

Claim 2: Your annuity will be worth less

Again, this prediction is based on uncertain economic modelling. However, if inflation does rise following a Brexit, this will hit the annuity incomes of people who have not bought policies that guarantee payments rise in line with prices.

There were 6 million annuities in payment worth £2,280 a year on average in 2014, the majority of which do not have inflation protection, according to the Association of British Insurers.

Assuming the economists are right and a Brexit vote causes inflation to rise, it’s true non-inflation linked annuity payments won’t stretch as far as they otherwise would have.

Claim 3: The value of your pension savings will fall off a cliff

“Those pensioners who hold UK financial assets such as shares and bonds would experience falls in their value if the UK were to leave the EU”, the Treasury claims.

This, again, is a guess based on the assumption leaving the EU would damage investor confidence and harm the UK as the economy becomes “less open to trade and investment”.

There are three things to note here. First, the impact of Brexit on your retirement portfolio would depend not only on the size of any shock to UK PLC, but also the extent to which you’re invested in UK equities and bonds. If your money is primarily invested outside the EU, for example, a Leave vote may have little or no impact on your investments (it may even enhance their value if sterling fall and then stays depressed for some time).

Second, the FTSE All-Share actually rose after the sterling devaluations of 1967 and 1992 and even gained ground after the IMF crisis of 1976, so there is no guarantee that a Brexit would lead to sustained damage to the stock market.

Finally, pensions and investing are a long-term game. So if the impact of a Leave vote is uncertain over 5 years, its implications over 10, 15 or even 20 years are impossible to divine.

Vote Leave would tell you we’ll become a more nimble, adaptable, fast-growing economy, while Remain argue vehemently the UK would be permanently diminished.

Ultimately, which of these scenarios would unfold is inherently uncertain.