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Adrian Boulding: A Brexit stress test for clients’ retirement savings

Boulding-Adrian-2012-700x450.jpgIt seems we are going to finish the year no closer to securing a Brexit deal.

If, in the worst-case scenario, we crash out on 29 March without agreeing something with the EU, the Bank of England has predicted a deep and damaging recession with even worse consequences for the UK economy than the 2008 crash. It predicts 7.5 per cent unemployment, accompanied by an 8 per cent drop in GDP in 2019 alone.

One of the concerns in a no-deal scenario is that some supplies, foodstuffs and medicines will be in short supply, while others will be subject to new tariffs, triggering price inflation of goods we take for granted right now.

Hard Brexit could increase pension deficit by 37%

It got me thinking about the idea of Brexit stress testing pensions savings. One approach might be to explore diversification if clients have the bulk of their equity investments in FTSE-listed businesses at this point. Indeed, the FTSE has already moved off its peak – starting 2018 at 7,648, it looks set to close the year below 7,000 and would almost certainly fall further in a no-deal scenario.

The other value of diversification is that the UK economy, regardless of the nature of the deal we carve out, will no longer be tied as closely to EU economic indicators. It makes sense to take a more global view on equity investing, buying funds with exposure to Japan, China and India, as well as the UK, US and Europe.

Clients concerned about inflation ravaging the value of their savings should think about inflation-linked bonds – government debt-backed bonds where the principal is indexed to monthly RPI, which is generally higher than CPI.

If you want to go deeper into defensive stock picking, you might want to explore which sectors are more resilient if the worst should happen. Take banking and financial services, where the prospects in a no-deal scenario are not good.

The EU’s current passporting system for financial services providers allows approved firms in any EEA state to trade freely with minimal authorisation. However, individual EU member states must adhere to the associated regulatory regime and enshrine it into domestic law for passporting to apply, and we are set to fall outside this regime post-Brexit.

How to prepare portfolios for the possibility of Brexit

If you scan across to the manufacturing sector, things look even more worrying. Once outside the EU, UK-based companies will be obliged to pay tariffs on the majority of goods travelling into the single market, of which we will no longer be members. This will inevitably increase the cost of UK manufactured goods to customers in the EU.

UK manufacturers exporting goods to the EU have two options post-Brexit: pay new tariffs on behalf of customers and take a significant hit to their finances or pass the costs on, see order books drop, and take a significant hit to their finances.

Think about stocking up ahead of less certain times. If people are predicting more worrying employment prospects post-Brexit, yet are higher rate tax payers today, it makes sense to put more earnings into pensions now while those savings are still attracting that higher rate tax relief.

And if you have clients over the age of 55 preparing for retirement, it is clearly sensible to move funds out of riskier, more volatile or locked-in investments. Increasing the percentage of a savings portfolio in cash will be a sensible strategy as you prepare them for decumulation.

Finally, make sure clients’ expression of wish forms, which accompany all wills, are up-to-date so that an ex-partner or already-deceased relatives are not named as beneficiaries should the worst happen.

With just three months left to get ready for Brexit, remember Benjamin Franklin’s most famous quote: “By failing to prepare, you are preparing to fail”.

Adrian Boulding is director of retirement strategy at Dunstan Thomas

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