The UK economy has entered its first recession since the Covid-19 lockdown four years ago, but what does this mean for you and your money?
The economy shrank by 0.3% in the final three months of 2023, according to latest figures from the Office for National Statistics (ONS). This follows a contraction of 0.1% in the previous three months, after the economy grew by 0.2% in the first quarter of 2023.
Chancellor Jeremy Hunt, who will deliver his Budget on 6th March ahead of a general election, said that the economy may turn a corner when inflation falls to the government’s 2% target, and the Bank of England brings down interest rates.
He said: “While interest rates are over 5%, the highest for 15 years, of course growth is going to be weaker here, like it is in many countries.”
A recession happens when the economic growth of a country slows down or halts. Individuals and companies rein in their spending, which in turn leads to higher unemployment. The official definition of a recession is two successive quarters of negative economic growth.
Here, we look at what impact a recession is likely to have on your finances, and what steps you might be able to take to protect yourself.
Your pension
The recession is expected to be relatively mild compared to previous recessions. However, if companies are impacted by ongoing cost of living crisis and reduced spending, their share prices can suffer, which in turn may negatively impact the value of your retirement savings.
It can be worrying to see the value of your pension fall, especially if you are approaching retirement, but it’s important to remember to avoid any knee-jerk reactions. Pensions are a long-term investment and as we’ve experienced following previous, severe recessions, such as the 2008 financial crisis, the hope is that your investments will gradually recover over time. Find out more about managing your pension when markets are volatile in our guide Nine tips for maximising your pension savings in difficult times.
If you’re thinking about making changes to your pension, it’s well worth seeking professional financial advice on the various options that may be available to yo
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
Annuities
If you’re planning to use your pension to buy an annuity, or guaranteed income, in the next couple of years, then a recession could actually be good news. Annuity incomes have risen in recent years, due in part to higher interest rates
According to investment platform Hargreaves Lansdown, someone aged 65 with a £100,000 pension pot could now buy an annuity income that will provide £7,117 per year. This is lower than the £7,586 you could have got in the aftermath of the mini-Budget in September 2022 but still substantially higher than the £4,629 you would have got three years ago.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “An annuity pays out a guaranteed income for life so can play a key role in making sure you can cover the cost of your essentials during tough times. Incomes may have come off the highs seen in the aftermath of the mini-Budget but they are still offering good value and the fact rates have settled down might prompt people to take the plunge and get one.
“Added to this, should the Bank of England cut interest rates later this year we may well see annuity rates start to fall back.It is also important to say there is no obligation to annuitise your pot all at once. You can annuities in slices throughout your retirement enabling you to cover your basic needs with a guaranteed income from the annuity while leaving the rest invested. You can then benefit from higher annuity rates as you age.”
You can find out more about some of the pros and cons of annuities in our guide Annuities explained. Remember that there are many factors to consider when deciding whether to go for an annuity or drawdown plan, or a combination of the two.
For example, with a drawdown plan, when you die, all of the money in your pension pot will pass into your estate automatically. However, this is not the case with annuities, so you will have to take specific action in order to ensure that your beneficiaries receive any money after your death.
If you aren’t sure which annuity to go for, or whether an annuity product is even right for you in the first place, always seek professional financial advice on your specific circumstances.
Your job
Recession usually results in a rise in unemployment, which can be worrying for people.
Unemployment in the UK is projected to rise to a peak of 16m people (4.6% of the labour market) by the second quarter of 2025, from around 1.5m at present, according to the Office for Budget Responsibility (OBR).
Whilst there isn’t much you can do to protect yourself from losing your job, there are a few ways you might be able to prepare for a period out of work. If possible, try to save a little each month, so that you have some cash available to tide you over until you find another role. You should also look into whether you might be eligible for any benefits if you’re no longer working, so that you can submit a claim as soon as possible if the worst happens. Find out more about some of the benefits you might qualify for in our guide Unemployment benefits: what are you entitled to?
You should also check whether you have any protection insurance in place which might provide you with financial support if you lose your job, such as mortgage payment protection insurance or payment protection insurance.
Remember, too, that there will hopefully be other roles available elsewhere which you might be able to apply for. If you’ve been in the same job or with a particular company for a number of years, the process of searching for another job online may be unfamiliar, but it’s where most companies advertise their roles these days.
You might want to start by browsing the jobs available on our site to find something local to you. Or, if you’re not 100% sure what you’re looking for yet, you might want to take a look at the career advice section of our website. Here, you’ll find career change guides as well as plenty of job ideas and inspiration.
Your mortgage
Mortgage rates often fall during a recession, as interest rates are cut to help boost spending and economic growth. The Bank of England held the base rate at 5.25% in February, the fourth consecutive month that rates have remained unchanged. Even though it remains unchanged, homeowners who fixed before rates started to rise several years ago still face a jump in repayments when they secure a new deal.
However, the good news is that mortgage rates started to fall this year as lenders competed for customers. According to financial website Moneyfacts.co.uk, the average overall five-year fixed rate mortgage now stands at 5.25%, while the average two-year fixed rate is around 5.67%. This is a significant fall in average rates since summer 2023.
If your current mortgage deal is due to finish soon, it’s worth starting your search for your next mortgage sooner rather than later, as cheaper deals are disappearing fast. Find out more in our guide Grab a cheap mortgage while you still can.
Most lenders will allow you to tie into your next mortgage three to six months before your current deal finishes, so you don’t have to wait until it ends to start your mortgage search.
Your property value
House prices have proved extremely resilient in recent years, despite ongoing economic challenges.
According to Halifax’s latest monthly house price index, property prices rose 1.3% in January, increasing by £3,924 to £291,029 compared to December 2023.
However, higher mortgage rates and unemployment are likely to have a dampening effect on house prices going forward. Read more in our article Should I buy a property now or later?
That said, the fact there is still such a limited supply of properties available may help support prices over the next couple of years. However, if more people default on their mortgages because they are unable to keep up with their payments, then prices could drop, as more homes may be repossessed and put up for sale.
If property prices do fall sharply, and you have a large mortgage on your home, there’s a risk you could end up in a position of negative equity, where you owe more than your property is worth.
However, this is only likely to cause you issues if you absolutely have to sell your home – otherwise, it makes sense to stay put and hope that property prices recover when we come out of recession.
Your living costs
Most of us will already be feeling the impact of steeper fuel, energy and food costs. During the ongoing cost of living crisis, most of us will be looking at ways we might be able to tighten our belts and reduce our spending.
Working out a budget can help you manage your money more effectively. Start by making a list of all of your monthly outgoings, with the exact amounts for things like rent or mortgage payments, debt payments, and mobile phone bills, and an estimated amount for things like food shopping and travel costs.
Once you’ve done this, you will have an idea of how much money you are currently spending each month and you can start planning how to move forward. Read our article How to make a budget and stick to it to find out more about making a budget.
When looking at all your outgoings, highlight any areas you could cut back on or find cheaper options if you need to. For example, could you opt for supermarket own-brands when you go shopping, save on your car or home insurance, or opt for a cheaper mobile phone contract? Although these may seem like small tweaks, they can often add up to much larger savings. For more money-saving tips, have a look at our articles How to save money – 21 best money saving tips and Seven ways to save on your household bills.
Compare cheap car insurance quotes
Car insurance renewal premiums have a habit of increasing every year, even if you haven’t made a claim. Compare car insurance quotes from over 110 UK providers – you could save up to £530* per year.
*51% of consumers could save £529.95 on their Car Insurance. The saving was calculated by comparing the cheapest price found with the average of the next five cheapest prices quoted by insurance providers on Seopa Ltd’s insurance comparison website. This is based on representative cost savings from February 2024 data. The savings you could achieve are dependent on your individual circumstances and how you selected your current insurance supplier.
Your savings
Savers are currently benefiting from higher interest rates, with some top rates beating inflation. Some of the best savings rates are even available on easy access accounts, which enable you to withdraw your money when you like. Top easy access accounts are currently paying around 5.10% compared to an annual interest rate of 5.20% on top one year fixed rate bonds. You can find the current top rates on fixed rate bonds in our guide Fixed rate savings bonds explained.
If, after working out your budget, you find you have a little bit of spare cash each month, it’s worth trying to build up an emergency cash buffer, so that you have some funds available in case your income reduces, or you are struggling to make ends meet. A spokesman for financial website Moneyfacts.co.uk, said: “How much you will need to stash in a savings account for your emergency fund will depend on your personal situation, but you would ideally want enough to cover your bills for a few months. It’s generally recommended that you have around 3-4 months’ worth of income saved in an emergency fund, just in case.”
Find out more about building a cash buffer in our guide How to build an emergency fund. If you’re unable to save anything at the moment because all your money is going towards covering your living costs, don’t despair, as there may be other ways to raise emergency cash. Learn more in our article How to raise emergency cash.
Finally…
Struggling financially or losing your job can take a real toll on your mental health, so whatever happens, don’t suffer in silence. If you are finding it hard to cope, our article Are money worries affecting your mental health? explains where to go for help if you need someone to talk to.
You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guide on How to find the right financial advisor for you.
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