Retiring during a recession – Balance: Wealth Planning

retiring during a recession

Economists recently announced that the UK has gone into recession, due to shrinkage of gross domestic product (GDP) in the last two quarters. Many people are worried that retiring during a recession could have a negative impact on their money and lifestyle. Let’s look at how this could affect retirees’ pension income and living costs.

At the time of writing, inflation and interest rates are still at the highest levels for 15 years. The cost of living continues to effect daily budgets for household spend and mortgage repayments. Put simply, these different factors mean that your money isn’t stretching as far as it used to a few years ago. As a result, pension income is now one of the biggest concerns for people about to retire in the current recession.

Our first piece of advice is to not panic. The likelihood is that you have been contributing to your pension for decades. So, the value of your pension will have naturally risen and fallen over that time anyway. Any financial decisions led by fear could result in big mistakes.

Will my pension go down in a recession?

There are no hard fast rules to how your pension will be affected. This will depend on the pension type, as well as the length and severity of the recession. However, it’s worth noting that the current recession is predicted to be relatively mild in comparison to previous ones.

There has been some concern around pensions becoming devalued due to the large fall in UK government bonds. Known as gilts, pensions are typically invested in government bonds, so this has had a knock-on effect on pensions. However, last July the government issued a high-yield bond, which could offer more security for investment portfolios.

Pensions are long-term investments so avoid making any rash decisions. As with any type of investment, the value may increase and decrease. If you are worried about a potential fall in pension income, then it’s important to seek advice from one of our financial planners.

Do I need to change my retirement strategy?

Most people might not necessarily need to change their retirement strategy, but it is definitely worth carrying out a review. We would urge caution if you’re considering withdrawing money earlier than planned to cover the rising cost of living.

The problem lies when a large sum is withdrawn early on in retirement, which coincides with a big fall in the fund value. In a recession, this could result in you running out of money sooner than expected. Your aim should be to manage pension income withdrawals sustainably, so you have enough income to cover your retirement.

If you are approaching retirement age, you could consider buying an annuity. This will give you a guaranteed pension income for life. It converts your pension savings into regular payments. Due to high interest rates, annuities have started to become more attractive in recent years. For more insights, read our previous blog, Are annuities worth it?

When it comes to your other investments, you could consider adjusting the risk level on your portfolios. Another option could be to hold part of your savings in cash, such as an ISA or a high-interest savings account. You could then use this to live on for the first few years of retirement instead of your pension. At 55 years (57 from 2028), you can also currently withdraw up to 25% of your pension tax free, which may cover essential expenditure.

Some people may choose to work for a couple of extra years or semi-retire to bolster their retirement income. It’s important to make sure you are making the most out of your pension allowances. This includes forwarding any unused allowances, which you can utilise from three previous tax years.

Pension Advice, Nottingham and Lincoln

Before you make any hasty decisions about your pension or retirement strategy, it’s important to carefully assess your situation. It’s crucial that you do not exceed your pension allowances, or this may result in a large drop in tax relief.

Based in Nottingham and Lincoln, our financial planning teams offer pension advice and retirement planning. Our Lifetime Wealth Forecast will give you clarity on when you will be in a suitable financial position to retire. Our aim is to ensure your pensions, savings and investments will support you throughout your retirement.

If you are worried about any aspect of this article or need retirement planning advice, get in touch to speak to our financial planners.