Brexit has been and gone while the impact of Britain leaving the European Union seems to have little impact on personal pensions. Politicians feared the sky would fall in if the nation voted to uncouple from the EU, but that concern seems to have passed.
Many financial experts are now taking the view that political events have no long-term effect on markets and that pensions and other investments simply ride out the storm. The major effect of Brexit on private pensions is the London FTSE 100 and FTSE 250 have climbed to record highs since the June referendum.
The reason why is simple – most of Britain’s FTSE 100 firms earn their profits from overseas.
How exchange rates affect your pension
Because the value of the Pound has plummeted to lows not seen on the currency markets for 30 years or more, the profits gain from a boost when converted from foreign exchange in pounds. The result is shares are increasing, and as most pensions are invested in shares, their value is growing with them.
The risk is a readjustment when the pound starts increasing in value as it is bound to do at some time in the future. The reverse will happen – the value of the FTSE 100 will drop as shares decline in value because companies are losing revenue due to falling exchange rates.
Inflation will knock spending power
Inflation is another worry for millions of British pensioners surviving on fixed incomes.
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Rising prices means less spending power for pensioners, and the Bank of England has made no secret that the economy needs a higher inflation rate somewhere near governor Mark Carney’s desired level of between 2% and 3% a year.
The latest figure, for September 2016, puts the annual inflation rate at just 1%. This is the highest for almost two years but still nowhere near the target. Brexit will ratchet up inflation. The price of imports is going up due to the falling pound, which will make goods more expensive in Britain.
Fuel, energy and food are the big three household expenses likely to see the most upward movement – and they can only go up in the foreseeable future. Private pensions may not have suffered from Brexit too much so far, but expect more volatility on the markets and a higher cost of living.