What does Brexit mean for your finances?

While the dust is unlikely to settle for months following Friday’s shock EU referendum result, you may be anxious about what all this uncertainty means for your retirement plans.

In these turbulent times, it is important not to make panic decisions based on speculation or rumour. The political and economic landscape may be febrile, but any attempt at saving or investing based on crystal ball gazing is fraught with risk.

So, in the short-term, the message is simple – keep calm and carry on.

Pension tax relief under threat?

The Government has confirmed there will be no emergency ‘punishment Budget’, so any spending cuts or tax rises will probably take place in the planned Autumn Statement following a Conservative leadership election.

However, this is likely a stay of execution rather than a full-on reprieve. If the economic warnings of the Treasury, Bank of England, OECD and others are proved correct, the next Prime Minister and his or her Chancellor will eventually need to wield the axe or raise taxes to balance the books.

There are a series of options available to the Government, but each is politically unpalatable. For example, cuts to higher rate pension tax relief or removing the state pension triple-lock would raise billions, but risk angering core Conservative voters.

Equally, increasing taxes on those in work would add insult to injury for younger generations, many of whom voted for the UK to remain in the EU.

Recent reforms to pension death benefits – which allow you to pass on pensions tax free when you die before age 75 – may also begin to look generous if, as expected, we move into an era of renewed austerity.

Either way, it’s worth considering making the most of the savings tax incentives the Government has in place while you still can.

Retirement investing – stick or twist?

Whether you’re 20 years from retirement or have already started drawing down your pension, the outcome of the referendum should not be the only factor you consider when investing your money.

We have seen gilt rates fall on the back of the result, depressing annuity rates and placing a strain on investors searching for yield.

But, boring as it may sound, you should remain focused on your retirement income goals and how much risk you are willing to take in order to achieve them, rather than getting sucked into second-guessing the market.

Ultimately everyone will eventually have to start looking at what really drives company valuations – profits and cash flow growth, which in turn are the result of the broader economic backdrop, as well as the competitive position, financial strength and management skill on offer from individual firms.

This is also why retail investors should be very careful about trying to time the market.  Market volatility driven by sentiment rather than company fundamentals is normally short-term and people should not panic or get over excited. 

In the end it is profit and growth that drives valuations over the long term and people should not lose sight of that when making decisions about their portfolios.

We will endeavour to keep you abreast of key personal finance developments during this period of volatility. But in the meantime stay cool and focus on your long-term goals.