Just as one economic problem starts to ease, another could be set to take its place.
That was the stark warning issued last week by Dr George Dibb, head of the Institute for Public Policy Research’s Centre for Economic Justice. Dr Dibb said that while inflation falling to 6.8% in July was encouraging, there is a “very real risk” that recession might soon overtake price rises as the UK’s chief economic worry.
Dr Dibb added: “Interest rate hikes take up to a year and a half to fully filter through to the economy. One year from now, ‘pass the parcel inflation’ might be over, but further interest rates might also have killed the recovery - there are already signs of falling consumer confidence and rising unemployment.”
Other economists share Dr Dibb’s fears. The National Institute of Economic and Social Research calculates a 60% chance of recession happening next year.
Given job losses and falling stock markets are common characteristics of a recession this may give you the jitters, particularly if you’re close to retirement. You might worry that your plans could be derailed, and you won’t have enough time to put things right.
After all, whatever you’ve saved once you pack up work will probably need to last a lifetime, and perhaps a loved one’s, too. And although retirement is a marathon and not a sprint, you’ll want to reach the start line feeling fully prepped. Let’s explore how you can give yourself the best opportunity to do so, whatever economic challenges come our way.
1) Get ahead of the potential threats
While it’s too soon to know whether recession will happen, it can be helpful to consider how your retirement plans might be affected if markets fall sharply, or your job was at risk.
Have you saved enough to not have to worry? If you lost your job, could you find another one? And even if so, is this something you really want to do? Can you work part-time and phase your retirement over several years? Are you invested in the right things?
Knowing the answers to these questions won’t avert the threats, but can help lessen the need to panic should they emerge.
Now is also a good time to check your savings are on track to meet your income needs, and factor in how this might change if economic conditions worsened. It’s equally important to find out if you have sufficient National Insurance contributions to get the full state pension. If not, the good news is you can make voluntary contributions to plug any gaps.
In the final years before retirement, you should have a firm idea about how you plan to draw income. Do you favour the guarantees offered by an annuity, or the flexibility of income drawdown? Or do you maybe want a bit of both?
Clearly your intentions may change between now and when you retire, but which option(s) you veer towards will inform how best to approach point 2.
2) Review your asset allocations
Choosing the right asset allocations is key whenever you’re investing for the long term but it is particularly crucial as you approach retirement. And even more so if there’s a risk of recession.
A good place to start is to peek under the bonnet of your pension savings to make sure you have the right mix of assets to support both your short and long-term retirement income requirements.
While asset allocations are a personal thing and depend on how much risk you’re willing to take, together with your capacity to bear investment losses, in most cases it’s prudent to have a diversified mix. This typically involves different asset classes such as bonds, shares, cash, and commodities spread across all corners of the globe.
You can tilt the weightings towards assets that carry more risk or less, depending on how you plan to draw income. For instance, if you’re certain about buying an annuity, this probably isn’t the time to be gung-ho. If you are heavily invested in equities and markets drop shortly before you retire, you may be left with a smaller pot to buy an income with.
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If you plan to use income drawdown, where your money remains invested, with at least some of your funds, there’s generally less need to be defensive. That said, it’s often wise to keep some in safer assets, such as cash, to fall back on should recession hit at the point of retirement and markets plummet. Due to something called sequencing risk, selling shares when markets perform poorly can affect your portfolio’s ability to recover once things improve.
Picking the right asset weightings can limit the effect a recession has on your retirement plans. My colleague, Sam Benstead, recently wrote an article on how to diversify properly – it’s well worth a read if you want some pointers.
3) Top up your pensions if you can
Your later working years can be a great opportunity to give your savings pot a shot in the arm.
If you’re mortgage free, the kids have flown the nest, and you have career-high earnings you should have more disposable income to plough lump sums into your pension. In theory anyway. I appreciate the ongoing cost-of-living crisis may make this tricker.
The up front tax relief on offer make pensions one of the quickest and easiest ways to boost your wealth.
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If you’re a 40% taxpayer, a £10,000 contribution will only cost you £6,000, while if you earn more than £125,140 and pay 45% tax, it will cost only £5,500. Paying into a pension can also help you keep your personal income allowance, which reduces by £1 for every £2 you earn over £100,000.
And new rules introduced in April mean that you can now contribute £60,000 (or 100% of earnings, whichever is lower) every year into a pension and get tax relief at your marginal rate. You might even be able to pay in more, as you can carry forward unused allowances from the past three years.
There’s a further reason why you should maximise these allowances while you can. And that’s because once you have drawn your pensions, typically the most you can pay in every year and receive tax relief drops to £10,000.
4) Beef up other tax-efficient savings
Other than your home, your pension is probably your biggest asset, so will likely provide the bulk of your retirement income. And due to the up front tax benefits outlined above, when saving for later-life, pensions will typically be the first port of call.
But it’s important to pay attention to other parts of your portfolio too, as this will widen your options in retirement.
For example, if you’ve been savvy and tucked away a hefty sum in a Stocks and Shares ISA, this can be a great way to complement any pension income you draw. This is for two reasons.
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First, while ISAs don’t offer up front tax relief, anything you take out is tax-free. This means you can draw less income and still get the same amount in your pocket.
Second, pensions are typically considered outside your estate, so if you have an IHT problem, drawing from your ISAs and leaving pension savings untouched can reduce your heirs’ future tax bill.
5) Delay your retirement
In most cases, this will be a last resort. But if you’re nervous about retiring during a recession, delaying retirement and staying in work (if possible) can bring several benefits.
For starters, it gives you some extra years to save, and your savings more time to grow. That said, if markets tanked this could have the reverse effect; hence why asset allocations play such an important role.
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A further benefit is that you have the option to defer your state pension, which can give your income a healthy boost when you finally claim it. For every nine weeks you delay, you get a 1% uptick, which is just shy of 5.8% a year. And you can choose between either a higher income or pocket a lump sum.
And lastly, if you plan to use income drawdown in retirement, retiring a couple of years later means your savings may have a shorter distance to last. Alternatively, if you’re set on an annuity, the older you are, the higher income you’re likely to get, although this will hinge on market annuity rates at the time.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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