Pension planning: five strategies to maximise your retirement income

Britain is heading for a recession. That means you’re going to have to make your money work harder. Here, Saloni Sardana outlines five pension planning strategies to help soften the blow.

The UK is expected to enter recession by the end of the year, something which is likely to cause people to rethink their finances and could spell economic trouble for many Britons.  

But for those moving closer to retirement, a recession could significantly worsen the quality of your later life if you don’t employ pension planning strategies to mitigate the impact.  

What is a recession and why are we expecting one?  

A recession occurs when there are two consecutive quarters of negative growth.  

Inflation in the UK is running at its highest level since 1982, with CPI inflation hitting 10.1%earlier this month. A cocktail of economic woes, including Russia’s invasion of Ukraine, rising energy prices, higher petrol prices and supply chain issues is causing a full blown cost of living crisis.  

Soaring energy prices are undoubtedly one of the biggest contributors to growing inflation. And now, all eyes are on the energy price cap, with a new figure expected to be announced tomorrow.  

A recession is a natural part of a business cycle, but it almost always results in short-term undesirable outcomes such as higher mortgage rates, job losses, lower wages and lower disposable income.  

But for those retiring the consequences can be more profound, Ricky Chan, chartered financial planner and director at IFS Wealth & Pensions, tells MoneyWeek. “Some people may have to delay their retirement date, while others in retirement already may have to keep a watchful eye over their spending, with the aim of reducing unnecessary expenses to ensure they have enough money to last their lifetime.” 

So what pension planning strategies can you employ to mitigate the impact?  

Five pension planning tips to recession proof your retirement  

Build an emergency cash fund 

Building an emergency cash reserve to cover spending for three to six months not only provides a buffer for worst case scenarios, (such as the loss of a job) but it’s also good for diversification.  

“Cash is king during a recession”, is a common saying among investors who believe holding cash during a downturn is important as it ensures there’s always some liquidity.  

Choose recession-proof investments  

Chan says those who hold insecure pensions, such as those that remain invested via flexi-access drawdown, and Sipps, are likely to be hit harder by economic turmoil. They might need to spend a bit more time on pension planning as a result.  

Pension freedom legislation introduced in 2015 paved the way for savers aged 55 and over to access their defined-contribution pension in a flexible manner, allowing you to withdraw up to 25% of your pot as a tax-free lump sum, while choosing how the remainder of your fund is invested, says online pension provider Pension Bee.  

“If you leave your pension invested and make regular drawdowns, inflation will continue to erode your pension,” Pension Bee says, adding that this can be offset if “growth of your investments outpaces inflation”.  

Buying equities with inflation-linked cash flows, such as infrastructure trusts, real estate investment trusts and utilities can be a great way to shield your portfolio from rising prices.  

Buy an annuity instead  

An annuity is a financial product that provides a regular guaranteed level of income, which may be the best option for those who’re not interested in pension planning.  

If you buy an annuity, inflation may not affect your level of income, Pension Bee says.  

Chan echoes this view: “[Pensions] that are secure with inflation linking (eg, annuities, defined benefit schemes, state pension) will be least affected”, adds Chan.  

Consider working longer  

Those who are in a position to should consider working longer, says Chan.  

Pension Bee reckons that rising inflation means pensioners need an extra £90,000 to be able to afford a decent lifestyle.  

“If you’ve already retired, inflation can affect your lifestyle more than if you were still working. This may be because your income is static rather than rising with inflation,” says independent financial advice firm Skerritts.  

In the UK, the state pension age is currently 66 for both women and men, but will rise to 67 by March 2028. In May 2023, the government will review the state pension age and decide whether to raise it further. 

You typically need to wait until the age of 55 to access a private pension, including defined benefit contributions.  

Pension savings can typically be accessed in four main ways, including flexible drawdown, buying an annuity, withdrawing your full pension savings or withdrawing in small amounts.  

Your pension pot will almost certainly grow more the longer you work and longer you wait before you start withdrawing your pension.  

Diversification is essential with pension planning  

Investors are always told to “never put all your eggs in one basket.” In an inflationary environment and in times of a recession this becomes even more important.  

“Having a portfolio with bond funds can counterbalance market volatility,” says Investopedia. “At the same time, a sufficient amount of stock funds and investments in real estate and commodities can help preserve the principal and counterbalance inflation. 

“By diversifying, you can help reduce your overall risk and potentially increase your chances of weathering a global recession.”

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