Donald Trump has laid the groundwork for a US recession that will have serious ramifications for Britain and could affect pensions in the UK.
The US President announced a raft of tariffs last week some of which he has now postponed, and the markets have responded poorly.
The stock market suffered its worst day since 2022, and the dollar was also significantly weakened as buyer confidence in America dried up.
Tech companies have been hit hard, as has Elon Musk’s Tesla, despite Trump announcing he would be buying a Tesla to support the X-owning billionaire.
It is a remarkable turnaround for the US economy which showed all the signs of booming when Donald Trump took office.
Now commentators are talking of an impending recession, compounded by Trump’s refusal to rule out an economic slowdown, which he called a ‘a period of transition’ instead.
As the world’s biggest economy, any downturn in the US is felt across the world as seen in Asian and European markets dipping this morning.
With Labour scrambling to get the UK’s finances back on track, a downturn in America will come as a fresh blow to Keir Starmer and Rachel Reeves.
Starmer and Reeves banked on economic growth in their bombshell Budget
PA
The Chancellor’s bombshell budget raised taxes by £40billion along with huge spending increases, but the measures relied in part on growth.
However, growth flatlined as the markets responded badly to Labour’s constant economic doom mongering, raising borrowing costs.
While Britain avoided a recession (defined as when an economy – as measured by Gross Domestic Product or GDP (a measure of all the goods and services that a country produces) – shrinks over two consecutive quarters, or six months in a row), the 0.1 per cent growth was cancelled out by population growth fuelled by immigration.
With the US now potentially heading for recession, alarm bells are ringing for those with financial assets in the UK like pensions.
Whether your pension will be affected comes down to what type of pension you have.
The type that could be most affected by an economic downturn is a Defined Contribution (DC) pension as they are directly tied to market performance.
DC pensions are invested in stocks, bonds, and other assets. During a recession, stock markets typically decline as businesses struggle and investor confidence drops.
This can lead to lower fund values meaning pension pots shrink and savers could have less money than expected.
Taking a crude example, if someone had £100,000 in their pension pot before a market downturn, a 15 per cent market drop could reduce it to £85,000.
However, experts have warned not to fall into a common trap if this depreciation of pensions occurs- don’twithdraw funds.
Becky O’Connor, director of Public Affairs at PensionBee, said: “While no one likes to see the value of their retirement savings fall, if you’re many years away from retirement, remember that it’s normal for pensions to fluctuate in value.
“Historically, pensions have always recovered and continued to grow, much like the stock market itself.
“Interestingly, downturns can be an opportune time to contribute more to your pension, as your contributions can purchase more units at lower prices, making it a cost-effective strategy.”
If they withdraw funds during this period, they lock in losses rather than waiting for a potential recovery.
“If you’re nearing retirement and are concerned about your pension, investing in a plan tailored for those approaching retirement can help mitigate the risk of losing value.
“When markets are down, it might be tempting to withdraw your investments, thinking your money is safer outside the market.
“However, the more you withdraw, the less you’ll have invested to benefit from a market recovery.
“Withdrawing during a downturn locks in your losses, whereas waiting for the market to rebound allows your investments the opportunity to recover and grow again.”
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Pensioners have been warned to not withdraw funds from their pension even if they are decreasing in value
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Other ways your pension could be affected by a global recession is by employers lowering their contributions to your pot.
During a recession, companies may struggle financially, and this is an easy way to lessen their outgoings.
Inflation will also have a large effect on people’s pensions as high inflation can erode the real value of retirement savings.
For example, if inflation is at 8 per cent but pension investments grow only 5 per cent per year, the purchasing power of those savings decreases.
The final way a recession could affect your pension is via interest rates and bond investments.
Many pension funds invest in bonds, which typically see lower returns during recessions, meaning less money for savers whose pension managers have invested in flatlining bonds.
It comes after many pensioners in Britain complained of being targeted by Labour since Keir Starmer took power.
Labour has enacted a number of measures affecting Britain’s elderly, namely the removing of the winter fuel payment and subjecting pensions to inheritance tax.
Labour says their measures are to plug the £22billion black hole left by the Tories but pensioners say they are being targeted as they don’t typically vote for Labour.
The government has committed to the triple lock, a mechanism that ensures pensions rise by either 2.5 per cent, inflation, or earnings growth – whichever is the highest figure.
