Brexit: no deal, no pension

A no-deal Brexit could scupper payouts for retirees in Europe. Should you worry?

Ano-deal Brexit could result in tens of thousands of expat Britons being denied access to their pensions. This is the worrying warning from some in the financial services industry and in theory, it is certainly possible. However, it's worth being aware that, even in the worst-case scenario, there would be at least one way around the problem.

An alarming impasse

Huw Evans, director-general of the Association of British Insurers (ABI) trade body, has warned MPs that, without a Brexit deal, it would be illegal for many pension providers to pay pension benefits to policyholders living in other European Union (EU) countries. But despite the attention the claim has attracted recently, it's not new the ABI has been pointing this out since Brexit talks began.

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The problem is that when the UK leaves the EU in March 2019, the "passporting" arrangements that currently enable UK-based financial services companies to operate in other EU countries will no longer apply. If the system is not replaced, these companies will have to stop all their EU operations including paying out benefits to pensionpolicyholders.

The impasse applies to most private-sector pension providers, from insurance companies to fund managers, as well as to the many occupational pension schemes that are now run by insurers. Employers should not be affected in the same way they should be able to go on paying occupational pension benefits if they run their own schemes, just as they'll be able to carry on paying staff living in different EU countries.

This is pretty alarming if you're living in the EU and receiving a private pension, or planning to move there in retirement. The exact number of people affected is difficult to quantify, but official figures show there are 247,000 British citizens aged 65 or over living in other EU nations.

But it's not all bad news. For a start, this is very much a worst-case scenario it's not too late for the UK and the EU to do a deal. Both sides appear to be moving towards an equivalence regime, which would offer many of the same rights as passporting. Also, many financial-services companies are already taking steps to protect themselves should the worst happen, most often by setting up subsidiaries inside the EU which would be able to trade. These businesses could be used to pay Britons' pensions where necessary.

In short, while Brexit could theoretically cut people off from their pensions, in practice there will be solutions for most.

A way around the worst-case scenario

As a last resort, Britons stuck in Europe with no access to their pensions could choose to open a UK bank account and have their benefits paid into that. They could then transfer the money into their bank account in their country of residence.

However, while this would solve one problem for expats, it would also bring new problems. Not least, many UK banks would be reluctant to open accounts on behalf of Britons who no longer have a clear connection with the UK such as owning a home here. In addition, bank-transfer charges and exchange-rate volatility could substantially reduce the value of your pension benefits.

Expats who do go down this road would be wise to shop around for the best deal on UK banking products.It's worth noting that new entrants to the market, including financial technology businesses that offer specialist money-transfer products (such as Revolut and TransferWise), may offer better value than conventional bank accounts.

No thaw for frozen state benefits

While the government continues to work to resolve the issue of how private pensions will be paid to expats in the EU after Brexit (see above), ministers insist that payments of state benefits will not be affected, whether there's a deal or not. However, the declining value of sterling has directed fresh attention towards the plight of another group of British pensioners whose state pensions are frozen in time.

Britain is one of only a handful of countries around the world that pays different levels of state pension to expats depending on where they live, even if they have made exactly the same tax and national-insurance contributions. Britons now living in a European Economic Area (EEA) country, or one with which the UK has a reciprocal social-security agreement, including the US, see their state pension go up each year by the same amount as pensioners still resident in the UK. But those who have retired to other countries, including Australia and Canada, get no increases at all; their state pension is paid permanently at the level due in the year in which they reached state pension age.

Lobby groups have been campaigning for reform for years, and calls for change have grown louder over the past two years as the value of the pound has fallen, further reducing the value of UK state pensions in many countries. So far, however, ministers have refused to change policy. In 2016, the government estimated that the cost of boosting payments to current levels ("uprating") would be more than £500m a year, with the cost of a partial uprating increasing pensions from now on put at around £37m.