The impact of Trump’s tariffs on UK pensions

In the wake of Donald Trump announcing new import taxes on goods from almost every country, the economic turbulence felt across the world has been substantial, raising concerns among those saving in a pension, and those already in receipt of a pension, about how such events may affect them here in the UK.

As a result, The Society of Pension Professionals (SPP) has launched a new paper on the subject.

The report says: “Given the scale of the equity market falls since early April 2025, and the fall in government bond yields, it is possible that some DC savers may see a reduction in retirement income of up to 20%”.

However, the paper also provides reassurance that millions of people in a Defined Benefit (DB) scheme – including Local Government Pension Schemes – as well as those who rely solely on the state pension, are likely to be largely unaffected. 

Defined Benefit (DB) schemes

Nearly 9m people are currently invested in a private DB pension scheme, also known as a final salary scheme, which guarantees a specific income for life based on each individual’s salary and length of service, rather than the performance of investments. The average DB scheme is well funded and has strong risk-management policies in place. Pensioners relying on such schemes are unlikely to see any immediate impact on their retirement income.

However, it is worth noting that some corporate sponsors’ covenants might be impacted, with risks including reduced demand for products, increased costs, supply chain disruption and an inability to raise finance. The covenant is the employer’s legal obligation and financial ability to support their DB scheme now and in the future; reliance on covenant is heightened by scheme funding challenges and greater market volatility. The covenant underpins overall scheme risk, and this is something that trustees will need to look at whether their schemes are in surplus or not. This could also have implications for government plans to make the extraction of DB scheme surpluses easier too - global economic uncertainties and their impact on the UK will inevitably focus pension trustees’ attention on the fact that surpluses can quickly disappear and should not be taken for granted.

Local Government Pension Scheme (LGPS)

Over 6.5m people rely on LGPS funds for a retirement income in England and Wales. The impact will vary scheme by scheme, but many will have significant growth allocations and for those funds the impact may be significant. However, pensioners relying on such schemes are unlikely to see any impact on their retirement income because their benefits are guaranteed – although there may be some indirect impact as a result of higher Council Tax bills.

Defined Contribution (DC) schemes

According to The Pensions Regulator, there are now more than 30 million people in the UK who are invested in a DC pension scheme. Typical members of these schemes probably have a significant allocation to growth assets, with large exposure to US markets, so the impact on such schemes is therefore likely to be significant. Pensioners relying on DC schemes may well see an impact on their retirement income (particularly those in the ‘drawdown’ phase), depending on how they are invested.

Implications for those about to retire

The biggest impact will be for those saving into a DC scheme. Typically, people about to retire with DC schemes will have less invested in equity markets, but there will be some with a substantial proportion. Given the scale of the equity market falls since early April 2025, and the fall in government bond yields, it is possible that some DC savers may see a reduction in potential retirement income of up to 20%.

Given the speed and volatility of such moves, those individuals may decide to delay taking their pension where possible. This may be a sensible step if markets are to recover in the short term but unfortunately nobody knows if a short-term recovery is likely. Deferring retirement means the savings pot remains invested and has the potential to grow but the plan value can go down as well as up. For those who decide to defer retirement, they may also wish to defer their state pension entitlement. The state pension of £230.25 a week (2025-2026) increases by the equivalent of 1% for every 9 weeks of deferral, which works out at an increase of just under 5.8% for every year of deferred retirement. The current market conditions, where an increasing number of savers are seeking a reliable retirement income for life, also mean that annuity rates are at a 16-year high.

The impact on those already retired

The impact on the UK’s 11 million+ retirees will depend on how pensioners have funded their retirement. For the 1.2m who rely on nothing but the state pension, their incomes will not be affected. Likewise, those with a fixed annuity should not be affected by the current market turbulence because their income in guaranteed.

DC savers who regularly sell a small portion of their investments to fund their retirement (known as drawdown) will face a difficult decision - do they sell less today, resulting in less income, in the hope that their pension pot will recover in the future or do they keep drawing down the same amount, knowing that they may have less to depend on in the future? Withdrawing during a downturn is always likely to reduce funds faster, so taking independent financial advice on a flexible withdrawal strategy is strongly advised.

Although the chances are limited, it is possible that some in a DC pension scheme with large equity allocations may consider coming out of retirement in an attempt to make up any shortfall. More than 1 million people over state pension age are already in employment in the UK. In addition to earning extra income by doing so, it is also worth noting that there are no National Insurance contributions to make, irrespective of earnings, because Class 4 National Insurance liability ends from the start of the tax year in the year after the individual reaches state pension age.

Conclusion

Given the above, those in well-funded private DB pension schemes can be confident that their retirement incomes will probably be unaffected. Likewise, those in an LGPS fund. It is also worth noting that the state pension remains unaffected and is protected by the Government’s triple-lock commitment. For those depending more directly on the markets for their retirement income, such as those in Defined Contribution schemes, it is important not to panic, to remember that pension investments are designed for the long-term and are frequently subject to bumps in the road.

Whether the dotcom bubble (2000), the financial crisis (2008), Brexit (2016), or Covid (2020), the stock market has endured several sudden and sizeable falls this century but recovered over varying lengths of time.

Many people may have recently withdrawn funds at the bottom of the current fluctuating market a few weeks ago and therefore would have missed out on subsequent recoveries. Some of that disinvestment may have been sensible but much is likely to have been a sudden reaction to the current market turbulence. It therefore makes sense for Government and the pensions industry to remind UK adults that making significant, reactive changes to pensions and other savings generally leads to poor outcomes, compared to cool heads and careful planning. The current volatility serves as a reminder of the importance of regular, long-term saving into a pension across a diversified portfolio of investments. Diversification of assets adds genuine value through risk mitigation. Consequently, steps that limit investment freedom can be unhelpful.

Just as falling markets can provide challenges if you need to sell, they can also provide opportunities for investment targeting long-term growth. The challenge is how individuals can adapt their portfolio as they near retirement – a challenge that the pensions industry is continuing to tackle.

Simon Daniel, chair of the SPP’s Investment Committee, commented: “The world is again enduring a period of financial turbulence and this has naturally created some uncertainty for UK savers and investors. This SPP paper sheds some light on the likely impact for both those who are saving into a pension arrangement and those who have already retired. The overall message from this paper is that making significant, reactive changes to pensions and other savings is generally not ideal compared with keeping a cool head and planning carefully.”