How will Brexit impact your pensions and investments?

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Some 51% of people with pensions and/or investments are worried about how their savings are performing, according to a recent Which? survey. With the Brexit transition deadline looming, will the outcome of negotiations be an additional cause for concern?

Which? surveyed 2,112 UK adults in September and found that of the 1,496 people with pensions and/or investments, 19% were ‘very worried’ and 32% were ‘fairy worried’ about their performance.

Your pensions and investments are likely to be invested in the stock market, so you may have noticed a fall in the value of your savings due to the bumpy market movements that have occurred during the coronavirus crisis.

The outcome of Brexit may be a cause of further economic uncertainty and movements in financial markets that may affect pension schemes and investments when the ‘transition period’  – which keeps most pre-departure arrangements in place until 31 December 2020 – ends.

Here, Which? explains how Brexit could affect your pensions and investments, how firms are working to mitigate risks to your pot and what actions you can take to protect your savings.

You can navigate this story by clicking the links below:



What’s happening with Brexit?

The UK left the European Union (EU) on 31 January 2020 under the terms of a negotiated divorce deal, bringing to an end 47 years of British membership of the EU.

From 1 January 2021, the UK will leave the European Single Market and Customs Union to implement an independent trade policy, bringing major changes to trading arrangements between Britain and the EU.

Both sides have been seeking an agreement to govern their trading relationship once the transition period ends.

The UK isn’t currently displaying signs of wanting to pursue a no-deal exit from the EU, but whether a deal will be reached is still very uncertain. Negotiations have limped along for months thanks largely to the impact of coronavirus.

Failing to secure an agreement with the UK’s biggest export market could amplify the losses caused by the virus. Big gaps remain on the three points of divergence: fishing rights, competition regulations and how a trade deal would be governed.

What is certain is that once the transition period ends, there will be significant changes regardless of whether a deal is reached or not.

How do events like Brexit affect the stock market?

Many investors plug money into stocks and shares in the hopes of achieving decent returns in the future. But even if you’re not a typical investor, as long as you’re saving into a defined contribution (DC) pension like a company or personal scheme, it’s likely to be invested in the stock market.

If markets are performing well, it’s more likely your pension and investments will be too (although this isn’t necessarily guaranteed).

Political news and events have one of the biggest impacts on how stock markets perform.

A recent example of this is when President-elect Joe Biden won the US election on 7 November; major stock markets around the world surged on hopes for stimulus to ease the effect lockdowns and restrictions have been having on the economy.

On 24 June 2016, the FTSE 100 and FTSE 250 fell around 9% and 12%, respectively, in the first half of the trading day thanks to the shock Brexit referendum result. The weakest sectors included food retailers and the travel industry, and it was feared that consumer confidence and spending would be impacted by post-referendum uncertainty.

The inability to forecast future events – in this case the uncertainty around whether a deal will be reached and what Brexit decisions could mean for the economy – can hit investor confidence. Making certain investments can be deemed ‘more risky’ in times where companies can’t as easily predict their future earnings.

But this doesn’t always apply – uncertainty can sometimes be a good thing.

Investors such as Warren Buffet are renowned for investing at moments when others don’t; when there is greater risk, there is more opportunity for rewards. Therefore, an event such as Brexit may create opportunities to buy into the FTSE 100 at a much lower price than it would be without Brexit risk.

How have investors been reacting to Brexit-related news?

Investors should be reacting to Brexit news as it comes in. When positive news is announced – such as encouraging developments in trade deal negotiations – the stock market may be more likely to go up.

The infographics below show examples of stock market movements after Brexit news at close of play from the previous day. While increases may not be the sole factor the FTSE 100 would have increased or decreased, it’s likely to have been a contributing factor.


What could happen to UK stocks after the transition period ends?

Should there be increased concern that the UK will be harmed by Brexit, there’s a chance this will be reflected in UK stocks.

But remember that losses can be short term – It’s harder to predict how Brexit will impact the stock market after the transition period ends, for how long and by how much.

John Roe, Legal & General Investment head of multi-asset funds management, told Which?: ‘The range of outcomes is looking narrower now, which in turn reduces the uncertainty.

‘There are some sectors that could be particularly impacted if there is no Brexit deal or special arrangements for them, such as autos, pharmaceuticals and aerospace.

‘This is one risk to job security as future investment in those sectors could be impacted. Longer term, it’s unclear if Brexit will be positive or negative for UK companies, but in the short term the uncertainty can be unsettling.’

If it does push down UK markets, the path to higher prices may be bumpy, but over time they should increase – markets tend to recover eventually. 

After the last financial crisis in 2008, it took the FTSE All Share 24 months to recover losses, according to Morningstar data.

Mitigating the risks: how your pot should be protected

Providers and investment managers will have fairly similar approaches on how to protect your pots and generally should be prepared for difficult market conditions.

Teodor Dilov, Interactive Investor fund analyst, told Which?: ‘As there are no clear signs of progress yet, large businesses have been trying to strategically position themselves so the impact of no-deals could be as minimal as possible.’

We contacted pension providers and investment platforms to see how risks to your pot can be mitigated. From the responses we got, one thing was clear – diversification is key.

DC pensions

Government-backed pension provider NEST has diversified its default funds (what you’ll be invested in if you don’t choose to make your own investment decisions) to protect savers – meaning your pension will be spread across a broad range of assets. 

Annie Bruzzone, NEST head of investment communications, told Which?: ‘Diversification is an important tool at our disposal. Being able to invest in a wide range of assets, each with different levels of investment risk, helps us pick the right combination to achieve the best risk-adjusted returns for our savers over the long term.’

The infographic below should give you an idea of the types of assets your pension could be invested in.

Some of your pension should be invested in more ‘volatile’ assets such as equities, and some should be invested in ‘safer’ assets such as bonds, which offer a fixed rate of return.

Some volatility can be a good thing for younger and middle-aged workers saving into a pension, as it means your monthly pension contribution can buy more investments when prices dip, PLSA head of membership engagement James Walsh explains.

James adds: ‘Anyone close to retirement, however, should consider shifting more of their pension savings into lower-risk investments, so as not to get caught out by a sudden drop in your pot’s value with no time for it to recover. Many pension providers will do that for you anyway, with no need for action by the individual saver.

‘There is no room for complacency, but in general, most schemes’ trustee boards have conducted detailed reviews of their Brexit preparedness. 

‘Their investments are well diversified and – most importantly – they see no reason why they won’t be able to continue paying pensions.’

There are things you can do to boost your pension in times of volatility, too.

John Roe told Which?: ‘Try to not focus too much on the short term and the volatility. Instead, focus on contribution levels and if you can afford to increase them, then consider doing so.

‘If you’re closer to retirement of course then remaining invested can feel more difficult in volatile times. If they do decide some action is necessary then doing any reallocation in steps can reduce regret risk and the chance of getting very unlucky on the timing of asset allocation changes.’

Personal investments

Like we said above, if you save into a pension, the heavy lifting should be done for you unless you choose your own investments.

If you make your own investment decisions the same principles of diversification apply.

Below are examples of what a well-diversified portfolio might look like.

Also, it’s worth trying to remember to never panic trade.

Generally speaking, dumping your investments in a period of uncertainty will do more harm than good. This is because panic-selling your investments often locks in losses and you could miss out on any recovery. Jumping back into the market isn’t easy, either.

James Norton, Vanguard senior investment planner, told Which?: ‘It’s so important to have a clear investment plan based around your goal. Investors need to decide how much risk they are comfortable taking. This will determine the amount they hold in high-risk shares and lower-risk bonds.

‘It’s the low-risk bonds that should help stabilise a portfolio during times of volatility and ensure the investor can sleep at night. And this is critically important, because the worst thing you can do when markets are falling, is to sell your shares. 

‘In fact, you should be doing the exact opposite, and rebalancing your portfolio back to the level of risk you started with. This will be uncomfortable, but it ensures that when markets rebound, your portfolio will benefit.’

Should I be invested out of UK stocks to avoid potential Brexit volatility?

It might be a wise move. You don’t need to take all of your investments out of UK stocks, but remember – diversification is also important globally; it’s not all about the actual assets.

James Norton continues: ‘Investors also need to ensure that their portfolios are globally diversified. Stock markets around the world react to different local market events. 

‘So although the UK and European markets are likely to be impacted either positively or negatively by the Brexit outcome, any impact is likely to be much smaller in the US and emerging markets [a market that has some characteristics of a developed market, but doesn’t fully meet its standards].’

Below is a map which highlights the top 10 emerging markets.

If you’re making your own investment decisions, it could be worth talking to an independent financial adviser to see how you can best spread your risk.

Teodor Dilov says: ‘While major established [stock market] indices such as [America’s] S&P 500 and the MSCI All Country World Index have managed to deliver positive returns (7.3% and 3.8%, respectively) despite the [coronavirus] market sell-off earlier this year, the FTSE’s performance has been catastrophic, being down -21.1% year-to-date. 

‘This just further highlights the importance of a good mix on asset, region and sector level in a portfolio.

‘Therefore, a global strategy could be utilised to both diversify the risk away and gain exposure to a broad range of revenue streams and different currencies. Ideally, large cap (companies with larger market capitalisations) quality strategies are well positioned to add more protection on the downside and benefits investors should market sentiment turn positive.’

How pension providers achieve global diversification

If you’re in a DC pension, your provider should ensure your assets are globally diversified. If so, just like other investments, your pot shouldn’t be hit too hard.

For example, B&CE, provider of The People’s Pension – one of the biggest pension providers in the UK – told us that less than 10% of its default fund is invested in UK companies.

Its chief investment officer, Nico Aspinall, told Which?: ‘We invest in a broad range of asset classes and regions around the world. Some short-term volatility due to uncertainty around the kind of trade deal agreed between the UK and EU is inevitable as we get into the final weeks of the year, but the actual moment of Brexit is unlikely to have major implications for global financial markets or our portfolios.

‘The long-term investments we hold on behalf of our members are invested globally to try to make sure we expose members to as many opportunities as possible, not just those in the UK.’

NEST also told us it ensures it isn’t overly reliant on investing in any one region.

Can you predict stock market movements?

It’s impossible to fully predict how the market will behave, especially over a short time. Past performance can be a helpful metric when choosing investments, but it’s no indication of future performance and shouldn’t be the only aspect an investor considers. 

There will always be risks associated with investing in the stock market. Beyond the assets themselves, other risks you should be aware of include: 

  • Inflation risk The threat of rising prices eroding the buying power of your money.
  • Specific risk If you invest in individual companies or shares, there’s always a chance that unforeseen events will scupper your portfolio. 
  • Currency risk You’ll face this risk if your money is invested in stock markets outside the UK.
  • Manager risk Some fund managers may consistently beat their benchmarks, but there’s a huge variation in the investment performance of individual managers. 

For help and tips about the world of investing, check out our guides.



source https://www.which.co.uk/news/2020/11/how-will-brexit-impact-your-pensions-and-investments/
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