Pensions specialists Penfold has unfolded what the impact of a possible recession will have on pensions including tips on how to prepare pensions in the event of another recession.
In the past, recessions have arisen when people become concerned about the economy and stop spending. Many of these same signs can be seen in the UK in 2022.
Currently, the inflation rate stands at a 40-year high of 9.4%, with reports stating that the rate could increase up to 12% in October, according to the latest data by ONS.
Rising energy costs and the cost of living crisis have already led to many Britons tightening the purse strings and with further rises to energy bills coming in the Winter, many are predicting a recession is on the way.
How does a recession affect your pensions?
What happens to pensions in a recession is broadly in line with what’s happening with financial markets as a whole.
Everything you pay into your pension is invested into something called a pension fund.
A pension fund is a big collection of pension savings that invests in a wide variety of financial assets, such as:
- Stocks and shares
- Government bonds
- Commodities like precious metals
- Overseas investments
Generally speaking, your money will be diversified – spread across a broad range of these investments.
When the economy is struggling, the value of these investments tends to dip as well – potentially impacting the value of your savings.
If you still have a few years before retiring (i.e. more than 5), you shouldn’t panic. Your savings will have plenty of time to recover.
In fact, if you can, continuing to pay into your pension when market prices are lower means you may benefit when the market eventually bounces back.
Top tips to prepare your pensions in advance
For those very close to retirement, you may have to act a little sooner. Consider doing the following:
- Moving to a pension fund comprising of less volatile investments like government bonds
- Drawing income from other sources for the short-term
- Pushing back when you start accessing your pension
However, before making any moves, you should always speak to a financial advisor before making a firm decision.
One thing we can’t predict right now is how long or severe any potential recession might be.
For example, the UK also dipped into a recession during the onset of the Covid pandemic, although it recovered in a couple of months.
If you’re worried about the future of the economy and its impact on you you can act now.
You can consider:
- Make a budget and reassess any short-term goals
- Clearing any high-interest debt
- Preparing an emergency fund
The best way to beat inflation is to put your money somewhere where it can grow.
By investing your money in a diversified, long-term pension fund, the return on investment that comes from your pension could outstrip inflation, helping preserve the value of your hard-earned money and leaving you with more than you began with.
Of course, investing can be a little scary. Saving into a pension involves risk, and the value of your pot can go down as well as up, more so in the short term. But that doesn’t mean people should be put off investing their money.
Truth is that leaving your money in a current account or under your mattress isn’t as safe as it might first seem. In fact, you’re actually losing money as inflation eats away at your savings.