Are you considering retiring in 2023? The depression of retirement savings from ongoing market volatility and a recession in the UK may have you wondering, is now the right time?  

Many personal pension funds have lost money over the last year as both stocks and shares, and bonds have taken a hit to their value. This is due to the rarely occurring correlation between these assets in a falling market. Traditionally they work to balance against each other, but in 2022 they became more closely aligned and both have been affected by falling markets.  

What this means, is that for anyone planning to retire in the next year and stop earning, there may be some tough decisions to make. Capital losses in the first two to three years of retirement can significantly affect long term income streams. If the amount we have in our retirement pot diminishes in these years, and money is withdrawn when markets are falling, then we have less money invested and it can be difficult to replace the wealth lost. This means there is less money in the pot from which to take an income.  

How people proceed with retirement in the current environment will depend on individual circumstances, based on the size and type of their retirement savings, and other savings and investments held.  

What also matters, is how and in what order we take money out of our retirement assets, as this can have an effect on inheritance tax and passing on our residual wealth to our beneficiaries. So, there is much to consider. 

Wealth Manager, Michael Dodds offers some options when considering what action to take. 

1. Reviewing retirement date 

This option may not be an ideal solution for anyone looking forward to giving up work. But assuming this is a personal choice rather than a mandatory requirement (for example, for some commercial airline pilots), it’s worth considering, given the economic circumstances, if now is the best time to retire. Temporarily deferring your retirement would mean you could continue to contribute into your pension; whilst investing when markets are down and cheaper to buy. If markets pick up further down the line, you could see greater value added to retirement funds. 

2. Phasing retirement 

Phasing more slowly into retirement, for example by reducing hours and income in steps, means less money needs to be taken from the pensions and investments, again keeping more of the money invested and giving the overall retirement fund more time to recover. 

3. Don’t take pension tax-free cash  

Many people set their heart on spending their tax-free cash from their pension on a holiday or other luxuries when they first retire. Leaving the cash in the pension means there is more invested which can grow as markets recover, and it can be taken at a later date. 

4. Use cash accounts 

Some wealth can be retained in cash to act as a buffer against selling investments in a downturn and for emergencies. Inflation will continue to erode cash accounts and investing a cash buffer in a downturn means it can be used to great effect. But retain some cash for emergencies, such as replacing white goods. 

5. Reduce expenses 

While reducing expenses may seem obvious, deferring larger purchases – a new car or home improvements, for example – can leave money in your retirement pot to grow. Small changes can also make a difference, such as reviewing our direct debits and subscriptions. How much do we use them really? A spring clean of the TV streaming packages to which we’ve been subscribed for years can find savings through downsizing to a smaller package or simply stopping for a while. Reviewing those little purchases, such as morning coffees or Danish treats, the cost of which all add up to maybe more than we think, can help.

The good news is that recessions do not last forever and the actions we need to take are likely to have a short-term horizon. 
 
Above all, it is important that no big or knee-jerk decisions are made in response to the market and economic situations. What you do and how you do it needs to be planned. Retirement is something you have been saving for throughout your working life, so it’s important not to be thrown by events and make a mistake that could impact your long term retirement income. 

Our Financial Advisers are here to help and guide you through tougher times. If you have your sights set on retirement in the next year and you have concerns, please talk to us. Call us on 0191 281 8811 or fill in the form here, and we will arrange for a member of the team to contact you.  

The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.