What is a recession? It’s a word we’ve been hearing a lot lately.
It’s usually defined as negative economic growth for two consecutive quarters. In other words, when the economy gets smaller over six months or so. It’s measured by the size of the fall in Gross Domestic Product (GDP) which is the value of all the goods and services a country produces.
We’ll take a closer look at what causes recessions, how a recession could affect your pension savings, and what you can do about it.
What causes a recession?
Recessions happen when people stop spending money, to the point where it affects businesses and jobs.
Recessions can be triggered by all sorts of things. Recently we’ve had the war in Ukraine putting additional pressure on an economy already weakened by the Covid-19 pandemic and the things that have come in its wake including broken supply chains, shortages of labour and rising oil prices. Inflation is shooting up much faster than earnings. It’s currently running at 9%, a level which hasn’t been seen for around 40 years. We’re seeing the cost-of-living crisis biting hard, with the prices of everything from fuel to food going up.
Interest rates are also going up, though not as fast as inflation. So people with mortgages, car loans and other types of loan are going to pay more. (Although interest rates rising isn’t all bad – if you’re a saver, for example, you get more interest on your money.)
The end result is that people spend less – creating ideal conditions for a recession.
What a recession means for your savings
If you’re saving in a pension, your money is invested. The value of some types of investment, especially company shares, tend to fall in a recession.
Depending on what they’re invested in, you may see the value of your pension savings go down. This can be alarming. Does it mean you should look at moving your money to ‘safer’ investments?
It may sound like a no-brainer, but history suggests this is one of the worst things you can do. It’s human nature to want to do something, but taking money out when investment values are low will simply ‘lock in’ the losses.
So, don’t panic. History also suggests that investment markets go in cycles, and what goes down eventually comes back up again.
Keep calm and carry on saving
Saving regularly during periods of low investment values can have some surprising benefits, thanks to ‘pound-cost averaging’.
Investments are divided into ‘units’ of equal value. When the value of investments goes down, the value of your savings falls – but the price of the investment units also goes down. So you can afford more investment units with the same amount of money. And you have more units to increase in value when markets recover, as they generally do.
So, counter-intuitive as it sounds, it could be a good time to think about putting more into your pension savings – although this is never a bad idea. You’ll be buying more low-priced investments to increase in value when investment markets start to rise again.
Time to put retirement on hold – at least for now?
What if you were planning on retiring but have seen the value of your pension savings plummet?
That’s not a great situation to be in, and you’re probably feeling quite frustrated. But it may, in the long run, be worth putting retirement on hold for now, and continuing to save. You could take advantage of pound-cost averaging to build up more savings for when conditions are better for taking your benefits.
Although times are hard, we’re not in a recession yet. The economy could bounce back. But if it doesn’t we hope we’ve given you some inspiration for making the most of your pension saving in difficult times.