Planning your retirement in a recession: How can you build your wealth in a downturn?

Recent years have seen a high level of turbulence enter financial markets, and seeing the value of your pension pot rising and falling through market volatility can be an unwelcome experience, to say the least. Should the worst occur and the UK fall into a recession, how can you continue to build your wealth through pension savings? 

The pandemic, geopolitical tensions, and the recent trade tariff uncertainty emerging from the United States have added a fair level of stress to pension management over the not-too-distant past, but you can rest assured that there are many ways to protect your pot by managing your exposure to disruption. 

Should the United Kingdom fall into a recession, the most important thing to do is to avoid panicking about your pension. Saving into pensions should be considered a long-term investment, and in the 21st Century, the UK has already overcome three major recessions, with the FTSE 100 trading at an all-time high as recently as February. 

Historically, the stock market investments held in pensions typically outperform money held in savings accounts, even despite short-term fluctuations. 

However, if you’re planning on retiring within the next five years, you may be negatively impacted by market downturns caused by a recession. However, there are plenty of options to help you overcome short-term uncertainty.

How Recessions Impact Pensions

What happens to our pension pots during a recession? Because pensions are comprised of financial assets like stocks and shares, government bonds, various commodities like precious metals, overseas investments, and property, downturns can negatively impact pension pots, but their diversified nature means that drops in value should be less pronounced than in financial markets. 

When the economy is struggling, the value of your investments typically dips as well, causing your pension pot to be worth less. 

Because markets generally recover over the long term, these fluctuations don’t have to be a pressing concern. However, if you’re planning on accessing your pension money sooner rather than later, these fluctuations can have a profound effect on the total money that you can withdraw. 

If You Plan to Retire Soon

If you’re worried about the impact of a recession on your pension pot ahead of retirement, it’s important to avoid panicking and instead make a measured plan. Hasty decisions about your pension savings can have a major impact on your wealth, and in some cases, waiting is better than knee-jerk actions. 

Your first course of action should be to evaluate your current pension portfolio. This will involve looking at the mix of assets in your pension pot, including stocks, bonds, and cash investments. 

By reviewing your pot’s composition, you can assess whether your investments align with your retirement goals and risk tolerance. If you have more volatile assets within your pension, it could be worth switching to more resilient and diversified investment options. 

If you’re confident that markets will rebound before you retire and don’t mind taking on higher risk, you may find that increasing your pension contributions in a recession can help you earn more returns during the market recovery. 

Because every contribution is boosted by at least 25% due to the tax efficiency of pensions, this saving strategy remains one of the most resilient approaches for building your wealth ahead of retirement. 

On the other hand, if you plan to retire soon and don’t feel confident that you can time the market recovery, it may be worth asking yourself whether you can postpone your retirement by a couple of years to ensure that you have the most comfortable retirement possible. 

Turn to Pension Drawdowns

To help mitigate the short-term impact of recessions on pension funds, you may find that a pension drawdown could be the best way to manage your withdrawals accordingly. 

Similar to taking out several lump sums over your retirement, a pension drawdown allows you to make withdrawals at different times. 

Unlike lump sums, drawdowns mean that your pension stays invested while you take a flexible income sourced from a drawdown pot. This makes managing your pension during a recession much easier to navigate.  

Your pension can be moved into a drawdown in full, or you can decide to stagger your movements over a prolonged period. Typically, you can take 25% of the total amount in tax-free cash upfront while keeping the rest of your money invested, allowing you to decide how much income to take after that. 

Choosing the Time to Retire

Building your wealth in a downturn can come down to market timing. Historically speaking, market corrections, which fall in excess of 10%, occur around once every two years and are fairly common. 

In the years that followed the Second World War, there have been 14 bear markets where losses have exceeded 20%. Many took just a year to recover, with an average recovery period of 14.5 months. 

This means that if you’re planning your retirement, playing the waiting game could be your best option when facing the prospect of a recession. However, adopting a more measured approach to building your wealth within your pension pot can ensure that you experience as little disruption as possible. 

With flexible withdrawal options and opportunities to balance the level of risk that you’re exposed to, you can rest assured that your pension can be well managed even as markets begin to struggle, paving the way for a happy and comfortable retirement.