Five tips for retiring in a recession

If you understand the risks, there is plenty you can do to safeguard your income and limit the impact a recession has on your retirement.

The Bank of England’s fears that we’re on the verge of the longest recession in 100 years comes as bad news for everyone, but it will be particularly worrying if you are planning to retire any time soon.

Unless you are retiring on a comfortable defined benefit pension, you’ll need to think seriously about the size of your pot and how you’ll go about turning it into an income that will keep going as long as you do.

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Unfortunately, a recession can make those planning decisions a lot more complicated.

All investors need to consider the impact of inflation and stock market volatility when coming up with a retirement income plan, but in a recession these considerations are even more pressing.

The rising cost of food, energy and petrol means you’ll likely need a higher income than you’d anticipated, while taking income from your investments while markets are falling will speed up the depletion of your pot.

However, if you’ve got an understanding of these risks, there is plenty you can do to safeguard your income and limit the impact the recession has on your retirement.

Here are five things to think about before you make any decisions:

1) Spend your cash

Yes, you’ve spent years investing into a pension to deliver an income in retirement, but right now there’s a strong argument for spending your cash reserves.

Keeping your pension invested and making withdrawals directly from it, provides investors with a flexible way of managing their retirement income, but it’s important you are aware of ‘sequence of return risk’.

This is where the combination of falling markets and the need to take an income from your pot combine to shorten the life expectancy of your pension. The impact can be significant, even if markets quickly recover.

This can be avoided by deferring taking benefits from your pension and spending cash savings first. 

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Another benefit of spending cash now, rather than later, is that its spending power won’t be reduced further, if we’re going to be lumbered with high inflation for a while.

Keeping around two to three years’ expenses in cash, will take the pressure off your investments and give your pension the breathing space it needs. Just make sure you are taking advantage of rising interest rates and shopping around for the best savings deals.

2) Find the best way to take income from your pension

When the time comes to access your pension, you’ll need to think about how you go about doing it.

There are two main ways of taking an income from your pension – flexi access drawdown and annuities.

Drawdown is the most popular option. This is because you have complete control about how much or little income you take and – as your money remains invested – there’s the potential for further growth. This can be a crucial weapon in the battle against inflation. With a pension pot of £100,000 at retirement, you could end up with £131,970 after 30 years, assuming you withdrew 4% per year and your investment growth averaged 5% per year.

Annuities pay a guaranteed income for life in return for a cash lump sum from your pension. They were once the most common way of converting a pension into income, but when pension rules were relaxed in 2015 and flexi-access drawdown was opened up to more retirees, sales of annuities dropped off a cliff.

Falling rates meant retirees were often disappointed by the income they were able to pay. But that is changing in the current economic climate and annuity rates have risen significantly in the past 12 months. Someone with a £100,000 pot could get an income of around £4,740 per £100,000, if they wanted an annuity that grows 3% each year and pays a 50% survivor benefit. Rates could be higher if you smoke, have high blood pressure or a medical condition that means you are likely to have a reduced life expectancy.

However, while annuity rates might be riding high, it’s important to balance that against reduced flexibility. Once you have taken out an annuity there’s no going back (after an initial cooling-off period) and unless you buy a guarantee, your beneficiaries won’t get any of that money back when you die. You also can’t change your income if your needs change. But, on the plus side, you know your income is secure and you don’t need to worry about navigating turbulent markets.

It's often a tricky decision but it doesn’t have to be an either/or situation. You could buy a partial annuity to cover regular bills and expenses and leave the rest invested. This could give you the potential for further capital growth and some helpful inflation protection, without losing access to your money if you need additional income or a lump sum.

Alternatively, you could go into drawdown at the start of your retirement and make the decision later. At this point, your spending might have dropped and you might have a better idea of how much you need to live on each month.

3) Don’t panic, but do review your portfolio

Investing through a recession can be nerve-wracking, particularly if you need to start accessing your retirement savings.

However, it’s really important that you don’t panic and make knee-jerk reactions when markets are volatile.

Moving investments into cash might help you sleep in the short term, but in reality all you are likely to do is lock in your losses and remove your opportunity to start recouping them when markets do inevitably recover.

That’s not to say you don’t need to review or make changes to your portfolio, but your focus needs to be around the fundamentals of long-term investing, rather than any attempt to time the market (which even the professionals often don’t get right).

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As a starting point, ensure that your portfolio is sufficiently diversified, with money across a broad spread of assets (so all your eggs aren’t in the same basket) and that your asset allocation is commensurate with your attitude to risk.

If your portfolio is too aggressively pitched, it may be time to reduce your risk profile and take a more balanced or cautious approach.

It’s also a good idea to think about the type of funds you use and how much you are paying for them.

Fund charges can put a serious drag on returns, so if you’re holding money in actively managed funds, check that performance justifies the cost. You might be able to achieve similar returns, often in a similar basket of shares, with a cheaper passive or tracker fund.

4) Rethink what work and retirement mean to you

Delaying your retirement for a year or two, is undoubtedly the most straightforward fix. If you’re happy and healthy enough to carry on working, you can put off accessing your pension.

But you don’t have to stick with work in its current form – any money you can earn in work will ease the strain on your retirement finances.

More people are taking a so-called phased retirement – enjoying a change of pace and more free time, without giving up work altogether.

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This could mean talking to your employer about reducing your hours, taking on a new, more enjoyable part-time job or even turning a hobby into an income-generating side hustle.

5) Get advice

If you don’t want to delay retiring but are worried either about how much you have saved or how you need to manage your investments through a recession, it may well be worth paying for some independent financial advice.

After a thorough ‘fact-find’ that takes your wider personal and financial circumstances into account, a good IFA will be able to help you put in place a plan that works for you. This will include help around where to invest and how much income you can afford to take.

As soon as you turn 50, you can also take advantage of the government’s free Pensions Wise service, which offers guidance (but not personal advice) on your retirement income options.