The transition period for the UK's exit from the European Union finishes at the end of the year. There is currently no clear idea about what kind of relationships the UK will have with the EU post-Brexit. The uncertainty can leave you wondering what happens to your pension. Can Brexit affect your pension payments?
No Change in Sight for State Pensions
Brexit does not mean any immediate changes to your State Pension. The UK Government is in control of State Pensions, including how much the State Pension is and who qualifies for it. The Government will continue to be in control after the UK leaves the EU.
The only exception can be your State Pension payments if you live or you work abroad.
Living Abroad: What Happens to Your UK Pension?
You can receive your UK state pension if you live abroad. Brexit has the potential to impact those pensions payments by:
Changing Annual Pension Uprating
The State Pension rate currently changes annually according to a system called the triple lock. The triple lock means the pension rate is adjusted based on whichever of the three conditions, average earnings, inflation or 2.5%, is higher.
If you live in any of the other 27 EU countries, your State Pension rate would be subject to the triple lock. It also applies to Liechtenstein, Norway and Switzerland.
The Withdrawal Agreement meant the system remains in place for anyone eligible for UK State Pension, and who was living in one of the listed countries before the end of 2020. If you’re planning to move to those countries from 2021 onwards, the situation will depend on the outcome of the negotiations.
The UK has similar reciprocal arrangements with other countries. These arrangements are in place because the country in question also uprates its pensions paid to its citizens living in the UK. The reciprocal arrangements are in place with:
- the US
The UK could strike a similar deal with the EU, leaving pension rates untouched.
If the UK fails to reach a reciprocal arrangement with the EU, your state pension payments might not benefit from the annual uprating. It won’t mean you won’t get your pension, but the amount you get might not increase the same way. It’s worth noting this is already the case with countries like Australia, Canada and South Africa.
Changing Your Qualifying Years
One big question is what happens to your qualifying years after Brexit.
When the UK was part of the EU, you could have worked in different member states and still make a single claim in the last country where you lived or worked. For instance, if you worked for ten years in the UK, ten years in Germany and ten years in Spain, your pension claim would be co-ordinated by the authorities of the last country you worked or lived in.
The Withdrawal Agreement kept the system in place until the end of 2020. What happens after depends on the outcome of the negotiations.
Furthermore, you need a minimum of ten qualifying years (years in which you made National Insurance contributions) for the State Pension.
While the UK was in the EU, you could have worked six years in the UK and four in another EU member state and still be eligible to claim the UK State Pension. You would only be paid based on the six years but you, nonetheless, could claim the UK pension. The work years in other member states would have counted towards the qualifying years.
This remains the same under the Withdrawal Agreement, but if you move to an EU country after 2020, it might not be the case any longer.
Brexit and Private Pensions
Brexit has the potential to impact your workplace and personal pensions, as your pension schemes might fall under EU legislation. The good news is that UK companies control a majority of workplace pensions.
In a Commons research briefing in 2019, the Pensions Regulator said that workplace pensions continue to be a domestic matter. The Regulator said it doesn't forecast a significant impact “in respect of the legislative basis under which schemes operate or trustees’ ability to continue to administer their scheme effectively”.
The UK Government has also put in place a temporary permissions regime. The regime allows EEA pension providers to operate in the UK after the UK has left the EU, and while they wait for authorisation from the Financial Conduct Authority (FCA).
The Government has asked pension providers to communicate with their clients in regards to possible changes. Your pension provider should be in contact with you if they foresee any changes in your annuity or other pension conditions.
The Economic Impact on Pension Investment Funds
Brexit doesn’t just have the potential to impact the legal side of pensions. No matter what your views on Brexit are, it could change market conditions. Adverse market reaction could influence your private pension investments.
Private pension pots tend to invest in a diverse portfolio of assets, limiting the risk associated with them. Knowing how financial markets react depends primarily on whether the UK reaches a trade deal with the EU, as well as what that will look like. It's also worth remembering that other significant events can impact your pension investment funds. Brexit is not the only thing with the potential to change your pension investments.
What Should You Do to Prepare Your Pension for Brexit?
Brexit's impact on your pension will be mostly unnoticeable in terms of your State Pension. Your situation might require extra attention if you're planning to retire abroad or you currently live abroad. Your pension investments might also be somewhat vulnerable to potential changes in financial markets.
For the large part, pensions are secured. The reaction of the markets cannot be predicted, and many legal issues won't be solved until the negotiations end before the end of the year.
For now, you should follow the developments and get in touch with your pension providers. They can tell you more about the steps they have taken to prepare for different outcomes the impact Brexit might have on your pensions.