Recently, it’s seemed like when you tune into news from the UK, you’ve found yourself watching a Kafkaesque comedy.
After a few turbulent years with Brexit, Covid, the war in Ukraine, and the global energy crisis, there was hope that things might settle down this autumn and winter.
However, the new Conservative regime announced their mini-Budget on 23 September 2022, and it was shortly followed by more market turmoil, a sharp weakening of the pound, and a raft of U-turns and reversals.
It can all seem worrying on paper, but don’t panic!
Working with a financial planner can help you navigate any short-term volatility and provide you with the calming reassurance that everything normally works out in the long term.
So, why should you be paying attention to events in the UK when you’re based in Australia? Well, if you have any UK pensions, or other assets in the UK such as ISAs or property, you could be affected.
Read on to learn about recent events in the UK and what they might mean for your money.
Current events have led to instability in UK markets — what you need to know
The mini-Budget outlined the government’s plans to cut taxes, particularly to top earners in the 45% bracket, as well as reducing Corporate Tax from 25% to 19%. Investors were spooked with the lack of detail on how these tax cuts would be funded and proceeded to sell off UK government bonds.
This sent the cost of borrowing for the Bank of England (BoE) soaring by over 20%. In turn, a Bank of England 2074 gilt, viewed by many as a risk-free investment, lost over 59% on its capital value in two days, which in turn forced BoE to intervene.
They began temporarily purchasing bonds to help calm the markets, and in doing so, hopefully protect pension funds from collapsing.
The former chancellor, Kwasi Kwarteng, and former prime minister, Liz Truss, have since lost their jobs and have been replaced by Jeremy Hunt and Rishi Sunak.
The new chancellor has since made a series of Budget reversals. He’s also taken further steps in an effort to calm the markets and strengthen the pound, which has, in the short term, seen the pound rebound slightly.
With the autumn budget due on 31 October initially being delayed, the new government finally released their autumn statement on 17 November. The Telegraph outlines the key budgetary changes such as reductions in Capital Gains Tax exemptions, IHT threshold freezes, the status of the “triple lock”, and the future of the EPG.
It can all sound very daunting on paper. But how does it all affect your finances?
A weakening pound can affect your UK interests in several ways
Imports into the UK could become more expensive, which can affect UK firms’ margins
As the pound declines in value, it becomes more expensive for UK businesses to import raw materials, obtain services, and acquire products that are priced in foreign currencies.
As companies’ profit margins shrink, they can also see their stock values decline, and one of the ways they might combat this trend is by passing the cost onto the consumer.
This can have a domino effect through the British economy, driving up inflation as the cost of goods and services increases, which in turn may see the BoE raise interest rates as a result.
If interest rates rise, so does the cost of debt obligations, and this may affect your UK interests in several ways.
There has been a rise in the cost of UK borrowing and transfer values of defined benefit (DB) pensions have declined in value by up to 35% compared with transfer values at the end of 2021.
UK investments may benefit from a weak pound, but foreign investments might be trickier
It might seem like a decline in the value of the pound would be worrying news for UK markets, but this isn’t necessarily the case.
Many major British companies, which make up the key UK stock market indexes, are global businesses that are domiciled in the UK. FTAdviser reports that around 80% of the earnings of FTSE 100 companies comes from overseas.
For these large firms, a declining sterling can be beneficial for their business. As they are likely to rely heavily on international trade, their overseas revenues will now be able to buy more pounds than previously when they are exchanged back into sterling.
Many UK companies still declare their dividends in dollars, which is an added protection for investors during unstable periods for the pound. UK businesses that export will also benefit from the situation, as British goods become cheaper for foreign buyers.
While the pound has since recovered against the dollar from it’s 50-year low, it is important to understand its relationship with foreign currencies for your financial plans, as the pound may dip again in the future.”
Market turmoil may have implications for your UK pensions and DB transfers
The effect on DB pensions
An unprecedented shift in the markets following September’s mini-Budget announcement forced schemes to respond quickly, as the sell-off of British government bonds (“gilts”) meant that the rate of return the bond generates (the “yield”) dramatically increased.
This affected DB pension funds because the schemes typically invest more than half of their assets in bonds. They do this in order to pay pension liabilities decades into the future.
These pension schemes hedge their positions through gilt derivatives, managed by liability-driven investment (LDI) funds, to avoid being overly exposed to market volatility.
If yields rise rapidly and to a large degree — as they did following the mini-Budget announcement – the schemes are required to provide more cash to the LDI funds, and this sets off a domino effect that eventually puts pressure on the funds to provide sudden collateral, which is where scheme becomes exposed to potential collapse.
The BoE’s intervention — through buying British government bonds — helped calm the markets and bought precious time for pension schemes to catch up and secure their positions.
So, rest assured that if you have a DB pension, it is likely to be safe and secure.
However, it is important to note that any DB transfer, as part of a qualifying recognised overseas pension scheme (QROPS) plan, can be affected by the value of the pound, which was weakened following recent events.
The relationship between a weakening pound and your QROPS
Firstly, a QROPS can be beneficial for expats as once you’ve made the transfer, your funds are protected from any potential negative effects of possibly breaching the UK pension Lifetime Allowance (LTA) and seeing your surplus funds taxed.
Secondly, the strength or weakness of a QROPS is intrinsically tied to the performance of the pound. It is all about timing. For example, if the pound is weak against the Australian dollar, your funds are likely to be negatively hit by the exchange rate. Whereas a strong pound could you result in you transferring over a larger pot.
I have been highlighting post-Brexit UK GBP currency risks to my clients for a number of years now and how imperative it is to measure the value of retirement savings in one domestic currency (Australian dollars), as well as how to mitigate this risk by exchanging GBP retirement benefits (held in UK pensions or QROPS) to Australian dollars.
The additional benefit being one less risk to worry about.
Dealing with DB transfers and QROPS is a complicated process. It is important that before making any decisions that could affect your pension pot, you consult a financial planner with expertise in this area.
Volatile markets can make for scary reading for investors, but it is vital to remain calm.
What can be done
There are three simple steps you can follow that will help you navigate any short-term instability. They are:
- Seek professional advice
- Address any lingering concerns
- Assemble a plan that suits your circumstances and helps you stay on track to meet your long-term goals.
If you have been putting off exploring how to position your UK pensions or from taking steps to reassure yourself that no action is required, now is probably a good time to get started.
As they say: “The best time to plant a tree was 20 years ago, the next best time is today”.
Get in touch
If you have any queries regarding your finances or assets based in the UK and how current events may be affecting them, please get in touch, and we can develop a tailored solution that’s right for you.
Please email jason@jasonoconnell.com.au or call 0498 740 840.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Workplace pensions are regulated by The Pension Regulator.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
Financial solutions for expatriates in Australia | Jason O’Connell is an Authorised Representative (“AR”) 1269423 Shartru Wealth Management. ABN: 46 158 536 871 operating in Australia under AFSL: 422409.
This information in this newsletter is general advice and does not take account of investors’ objectives, financial situation or needs. Before acting on this general advice, investors should therefore consider the appropriateness of the advice having regard to their objectives, financial situation or needs.