UK pensions are a time bomb; Brexit might help detonate it early

As if we didn’t know already, last week we got another reminder of the economic disaster that Brexit is shaping up to be: Retail sales weakened in the UK, as price rises eat into consumers’ purchasing power.

Inflation is running at 3%, a rate that seems high even in emerging markets nowadays. Blame it on the pound, which since the Brexit vote in June 2016 lost around 20% of its value versus major currencies. As Britain has a gaping deficit for goods imports, the rise in inflation should not surprise anyone.

Those who voted Leave and still think it was a good idea insist that this is a short-term problem, and that once out of the EU and free to strike its own trade deals, Britain will quickly become an extraordinarily competitive economy.

Even assuming that these super-optimistic predictions have a chance to be correct, they might be scuppered by another problem that is beginning to take shape. A recent survey by the Financial Conduct Authority (FCA) showed that around 30% of adults in Britain don’t have a private pension.

Most likely, these people, around 15 million of them, will have to rely on the state pension in their old age, which is lower than in other developed economies: it is £159.55 per week, but only for those who have contributed for 35 years.

The full state pension, therefore, amounts to £8,297 a year – not even £700 a month to live on. On the bright side, there’s no tax to pay on that, as currently tax kicks in only after earnings exceed £11,000 a year.

It’s a bleak picture. Brexit will only make it worse, because the ranks of the 15 million could in fact swell. Returns on private, defined-contribution pensions depend on interest rates, and these have been at historical lows since the financial crisis.

The Bank of England has said it would raise interest rates, but everybody knows it cannot do so in any meaningful way: increasing interest rates to the point where they exceed inflation (currently at 3%) is impossible without crashing the housing market.

Brexit made this problem worse, because it lowered interest in British residential property from foreigners, and it also dampened first-time buyers’ enthusiasm with the uncertainty it created.

As many people rely on residential properties — either their own homes, or buy-to-let properties, or indeed, both — for their pension, any interest rate increases may mean some of these people will be forced to give up some of their property wealth as servicing their debt will become much harder.

The Bank of England is in an impossible situation: either way, it will have to sacrifice one set of pensioners. The Brexit vote has made that dilemma more immediate.