Will 2025 be a good year to retire?

If your plans for 2025 include giving up work and moving into retirement, what’s happening in financial markets could make a real difference to your prospects for years to come.  

Retirees in the past may have been able to quit work with a high level of confidence about their financial future, but if you’re retiring today this is likely to be less certain with your income coming from sources that are influenced by the ups and downs in markets. 

Many of the risks you face are outside of your control. Nonetheless, understanding them will help you mitigate them and up your chances of maximising your income options. Here’s what the financial conditions for retirees look like in 2025. 

• See our current offers to help your money go further

Pension pot performance 

The past few years have been a rollercoaster for those approaching retirement. Most saw their pension pots suffer sharp falls in 2022 as both stocks and bonds - the two assets most likely to comprise the bulk of portfolios - fell in tandem.  

Since then, there has been a divergence in the performance of shares and bonds. A recovery in stock markets began in late 2022 and the winning streak has continued largely uninterrupted ever since. Bonds, meanwhile, have failed to recover to their pre-2022 level.  

It means the state of pension pots going into 2025 will depend on the exact mix of assets - those holding a higher proportion of shares over bonds will have done best while those holding more bonds may still be behind where they were three years ago.  

For example, a blended fund of 60% shares and 40% bonds would now be 8.8% above its level from the start of 2022¹. A fund of just 20% shares and 80% bonds would be 6.2% below where it was at the start of 2022². 

That’s important because many workplace pension funds will increase allocations to bonds as retirement approaches. 

Annuity rates 

The silver lining of lower bond prices has been higher bond yields (prices of bonds move inversely to yields) and these have fed through to better rates on annuities, which take pension savings and pay a guaranteed income in return. 

Yields on government bonds - the assets used to price annuities - tend to rise and fall in line with interest rates. Rates have been elevated for some time and have only begun to fall back from their peak recently.  

Right now, the highest-paying annuity would generate an income of £9,491³, based on a healthy individual aged 65 and with a 3% increase in payments each year to mitigate inflation. 

It’s possible to form a view of where interest rates - and therefore annuities - will head in the future based on bond prices today. Right now, the bond market is suggesting that the Bank Rate will fall from its current level of 4.75% to around 4% by the end of 2025⁴. 

This suggests annuity rates could move lower as well as 2025 goes on, although they should still remain higher compared to recent history.  

Drawdown 

Those planning on using an invested pension to generate an income may well have seen their pots recently grow thanks to the strong recovery in stock markets. However, what really matters now is how markets perform in the future.  

No one knows that for sure. For what it’s worth, analysts at Goldman Sachs recently forecast that the US market, which is not the whole stock market universe but by far the biggest component would rise at an annualised 3% over the next 10 years⁵. That would be low by recent historical standards. 

But as important as the long-term return from markets is the sequence in which returns come through because these can dramatically affect the value of your pension pot over time. If you begin regular withdrawals and your pot suffers investment falls, you face having to sell more assets in order to produce the income you need. This leaves fewer assets to benefit when prices recover. It’s an effect known as ‘sequencing risk’. 

Ideally, you will begin withdrawals in a rising market, allowing you to sell relatively fewer assets to get the income you need in the early years of retirement. We do not know, of course, where markets are headed in 2025. However, a quick look back at history is encouraging for anyone planning on beginning their withdrawals.  

The chart below shows the value of a £100,000 pot where 4% annual withdrawals were started in different years over recent history. By doing so, it demonstrates the range of different outcomes that have been achieved in different market conditions.  

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.