How to prepare for retiring in a recession

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Retiring during a market downturn presents a lot of risks, but steps can be taken to protect investors’ pension pots.

An impending recession presents an alarming situation for most investors, especially those who are approaching retirement.

People who have contributed to their pension pots over many years have likely seen their savings dwindle over the past couple as the market downturn has sent many popular funds tumbling.

Mix that with the highest inflation in more than 40 years and those nearing retirement are left in a tricky situation – is it best to withdraw early to ease the rising cost of living, or hold on and risk watching your hard-earnt pension fall even further?

The most important step is to not get caught up in short-term panic and make fear-led decisions that you may regret later, according to Tom Selby, head of retirement policy at AJ Bell.

“Retiring during a period of high inflation and with recession in the UK all-but-inevitable may feel daunting, but it shouldn’t fundamentally alter your strategy,” he said.

Making rash decisions that could impact your long-term strategy is not a good option, but those who do not contemplate their pension plan at all “risk sleepwalking into disaster in their later years,” according to Selby.

Investors who want to access their pension savings soon should consider when they want to start making withdrawals and adjust the risk scale on their portfolios accordingly.

Selby said: “The biggest challenge for those in drawdown – and particularly the early years of drawdown – will likely be managing their withdrawals in a sustainable way.

“If large withdrawals are combined with big falls in the value of your fund, there is a real possibility you will run out of money early in retirement.”

Some people who are near retirement age buy an annuity, which provides a regular guaranteed income, as it shifts pension portfolios towards lower-risk assets such as bonds.

Selby said those who don’t plan to buy an annuity need to realign their pensions strategy to meet their retirement plans or risk losing their savings in volatile assets.

“It is likely thousands of people who were in old lifestyling strategies but no longer plan to buy an annuity are now sat on big losses following the collapse in government bond prices recently,” he added.

Alice Haine, personal finance analyst at Bestinvest, said that one option for those concerned about withdrawing from their pension in a recession would be to simply continue working.

In the meantime, they would benefit from making the most of their unused allowance – investors have a cap of £40,000 they can contribute to their pension annually, but they can also carry forward any unused allowance from the past three tax years.

This could give investors a potential £120,000 that could be saved for their retirement years.

Those approaching retirement would likely resent having to delay their plans however and opt to withdraw early if possible.

Those who want to access their pension in a recessionary environment could keep their savings safer by holding them in cash rather than investing through the downturn, according to Haine.

“With so much volatility in the markets, cash might be your friend for the first couple of years rather than going straight into pension drawdown,” she said.

“However, don’t hold too much in cash as the risk is that it will be eroded by double-digit inflation.”

Those that do want to retire should look to use up cash in their savings accounts, ISAs, or bonds, prolonging the time that pension pots are invested, according to Haine.

After this, investors could then withdraw up to 25% of their pension tax free after turning 55, which could go towards essential expenditures, leaving the rest in the pension to continue growing.

However, people should be cautious not to exceed this threshold as their tax relief could drop drastically from £40,000 to £4,000.

This is “not a great scenario if you want to continue topping up a pension,” Haine added, but said that investors could avoid this penalty by withdrawing from an old workplace scheme or a private pension such as a SIPP as pension accounts below £10,000 do not count.

There is always the option to increase the cash weightings within a pension portfolio itself, which could lower the chances of having to cut sell weakening assets for income.

The prosect of retiring during a recession may seem dismal, but David Cadwallader, investment manager at wealth manager Brewin Dolphin, urged investors not to go into panic mode.

A recession is likely, but the magnitude of the decline could vary substantially – the levels of unemployment, housing market corrections and stresses in the financial sector could be milder than that of 2009 and 2020.

Cadwallander added: “If these more severe recessionary events are avoided, it is quite possible that equity markets have already discounted a lot of the coming economic weakness.

“Similarly, because equity and bond markets typically price in a recession well ahead of it being officially announced, they often start moving higher well before the economy itself starts to show signs of recovery.”

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