The 2020s have got off to a bumpy start. Continued Brexit fallout, a pandemic, the war in Ukraine, and the cost of living crisis, have made for a turbulent few years for millions of Brits.
But as Brazilian novelist, Paulo Coelho, once succinctly put it: “Everything will be okay in the end. If it isn’t okay, it isn’t the end”.
There’s always time to overcome obstacles and make things right. It is vital to stay calm and persevere.
It is important to keep this in mind as a recent BBC report confirms that the International Monetary Fund (IMF) expects a third of the world to be in recession in 2023.
According to Reuters, the UK in particular faces a sobering economic outlook as a recession grips the economy and cost of living issues persist.
So, what steps could you potentially take to navigate the challenges of a recession?
Read on to discover five useful ways to protect your wealth and ensure you stay on course to meet your long-term goals.
5 useful ways to protect your wealth during a recession
1. Review your savings and consider setting aside an emergency fund
Typically, rising interest rates can be beneficial for your savings. The growth generated on your funds helps your money keep pace with inflation and avoid the eroding effect on your savings’ “real terms” value.
However, when inflation is significantly higher than interest rates, it is important to consider reviewing your savings situation.
You might consider the benefits of establishing an emergency fund.
Putting aside three to six months’ worth of essential bills could help protect you and your family should unexpected challenges arise. The peace of mind could also provide a helpful boost to your emotional wellbeing.
The fund would aim to cover short-term essential outgoings such as:
- Rent/mortgage
- Utilities
- Groceries
2. Ensure your income is secure by considering essential protection
Recessions typically lead to rising unemployment and the possibility of job losses. According to MoneyWeek, unemployment in the UK is expected to rise to 4.1% by late 2023.
Consider taking out Income Protection to cover the possibility of redundancy.
The cost can differ greatly depending on your:
- Health
- Lifestyle
- Length of coverage.
There may be short-term cover options that are reasonable and affordable. If you require a more long-term plan, it is likely to be more expensive, but some plans can provide you with an annual income until your retirement if the worst occurs.
3. Evaluate your debts and outgoings
It is important that your debts and outgoings are managed efficiently. Otherwise you can leave yourself exposed to hefty bills and struggle to maintain your desired standard of living.
Rising interest rates can rapidly make debt obligations unmanageable. If you find yourself vulnerable to the fluctuations of a variable- or tracker-rate mortgage or a similarly structured loan agreement, you may want to review your arrangements.
Sharp interest rises can significantly increase your monthly outgoings, which could put added pressure on your household.
4. Maintain your pension contributions
It is natural to find yourself drawn towards focusing on short-term problems and neglecting the long-term bigger picture. If you’re struggling to cover your outgoings, reducing or stopping your pension contributions might seem like a desirable option.
However, this can be harmful to your long-term objectives and can potentially create issues for your eventual retirement.
Pensions are incredibly tax-efficient vehicles and reducing or stopping your contributions could mean you lose out on:
- Tax relief, which is paid automatically at the basic rate of 20% and extra relief can be claimed by higher- or additional-rate taxpayers up to 40% or 45% respectively
- Employer contributions, which due to current auto-enrolment rules are at least 3% if you are maintaining your contributions. If you opt-out, you essentially lose out on this “free money” towards your retirement pot
- Compounded returns on your pension investments.
By maintaining your contributions during a recession, you can ensure you stay on track towards a comfortable level of retirement and avoid a pension shortfall.
5. Consider investing any surplus funds to try and generate the growth needed to reach your long-term goals
Investing can be a proactive way of generating the growth needed to reach your long-term goals. However, it might seem worrying to invest during a recession as fears of potential losses skew your judgement.
Investing can be risky, and a recession might sound concerning. But it is important to note that a recession refers to economic performance — and the stock market isn’t the economy.
Stock markets are volatile by nature and are likely to ebb and flow over the short term. Over longer periods the trend of the markets is upwards. Despite the past 12 months being considered especially volatile for global markets, the Guardian reports that the FTSE 100 recently hit a record high.
According to IG, the FTSE 100 produced average annual returns of 8.43% over any 10-year period between 1984 and 2019.
Selling during a downturn converts a paper loss into a permanent one. It removes the potential for your investments to rebound, and potentially grow over the long term.
Investing during a recession can also offer potential opportunities, as typically high-quality stocks can be available at reduced prices. So, investing in the present could lead to significant rewards in the long term when the markets eventually bounce back.
Get in touch
If you have any lingering worries about the recession and the state of your financial plans, working with a financial planner can go a long way towards alleviating them.
A good first step is to reach out by emailing info@lloydosullivan.co.uk or calling 020 8941 9779.
Please note:
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Workplace pensions are regulated by The Pension Regulator.
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