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The Aftermath of the EU Referendum

Two months on from the prediction by some of a catastrophe and the world seems to be much the same. Instead of having an explosive effect, the aftermath of the EU referendum seems to have more in common with Kilauea than Krakatoa.
Yes, there is still a lot of noise from the politicians from both sides of the argument and some less than kind words from Brussels, but we are all still going on with our lives in the same way.

So, rather than speculate about what might happen, let us have a look at how some of these subtle changes are affecting us in a financial sense. On the night of the vote all the signs were that we would remain and that the following morning the stock markets would rise from their low point. When we woke early on the twenty fourth, sterling had fallen against the dollar, all the UK stock indices were down and the European stocks, especially the Italian, had fallen even further.

Since that time the UK’s leading index of large companies has risen 14% and even the mid cap index has moved forward by 19%. Many of these companies will be buoyed by increased opportunities for exporting and receiving more pounds for the dollars and euros profits they are bringing back to the UK.

The actions of the Bank of England

All this sounds positive for investors, but the actions of the Bank of England may end up having a more significant effect on many peoples’ daily lives. Lowering the base rate is great for mortgage owners, but damaging for savers dependant on the interest from their savings accounts. However, the biggest damage is being done to people about to retire.
A single life annuity for a male reaching retirement this year is now as low as 4.4% as result of lowering the base rate. The obvious problem is that retirees will need to have a bigger pension pot to pay for retirement which is likely to result in many having to continue to work part time or delay retirement altogether.  Following the Dot.com bubble, the pension industry created Pension Lifestyling to protect you from falling stock markets in the run up to retirement. With pension pots performing quite well it is a real shame to see many people being punished at the end of the working life by low annuity rates.

Low sterling exchange rates will see the cost of some household items rise, which in turn may put pressure on wages and inflation in the future. Pensioners are particularly vulnerable to inflation which could see the fixed income offered by annuities devalue rapidly leaving many of today’s pensioners to struggle financially.


The Panorama’s Pension Rip Offs Exposed program in July showed the fragility of the pensions market with people seeking higher returns unaware of the risks. The industry is plagued by the ‘Non Advice’ sector that make it very difficult for desperate investors to identify professional and qualified Wealth Managers because they are focusing on the potential for higher returns rather than the qualifications and commissions paid to the salesperson in front them. If in doubt, you can look on the FCA register [https://register.fca.org.uk/] to see if your adviser is still active.

If the person is not listed as active they will not be authorised to provide financial advice. I mention this because the lower the annuity rates fall the higher the Cash Equivalent Transfer Values for final salary schemes will become. This leads people to consider leaving the relative safety of minimum income guarantees and rising incomes of these schemes in favour of the death and inheritance tax benefits offered by Flexi-Access drawdown.

Flexi-Access drawdown is becoming common

Which brings me to my second point, Flexi-Access drawdown is becoming increasingly common, even for people with lower attitudes to investment risk. Generally, only people willing to accept the minimum of a moderate investment risk profile would have been recommended a Flexi-Access drawdown plan to avoid buying an annuity. Flexi-Access Drawdown carries greater investment risks, is more costly and you could see you run out of funds before the end of your life compared with an annuity.

If you are considering opting for Flexi-access drawdown you need to ensure that the investment strategy is within your comfort zone and realistic to achieve your goals. Your adviser should be insisting on regular investment reviews to make sure that your portfolio is adapted to deal with the changes in the global economy and that it is able to continue to meet your income needs.

We can all sail when the waters are calm, but I would recommend that all potential sailors report to the coastguard before setting off. Pension rule changes have created more options, more complexity and increased the risk of running out of funds before the end of your retirement. A free consultation with a Wealth Manager might save your lifestyle in retirement.

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