What Happens to My Retirement Income if Investments Fall?

Why do investment falls feel different in retirement?

During the accumulation phase — when you are building a pension — a market fall is uncomfortable but often manageable. You are not withdrawing money. The fund can recover, and future contributions buy more units at lower prices.

In retirement, the dynamic changes.

You are now withdrawing from the fund. A fall reduces the pot from which withdrawals are taken. If withdrawals continue at the same level during a fall, the fund is depleted faster — and has fewer assets to benefit from any subsequent recovery.

MoneyHelper confirms that with drawdown, the pension fund remains invested and can go up or down in value, and that there is a risk of running out of money.

This is not a reason to avoid drawdown. It is a reason to understand how it works and plan accordingly.

What actually happens to your income when investments fall?

The fund value falls. That is the direct effect.

What happens to your income depends on what you do next.

There are broadly three responses:

Steve's observation

A market fall is not a retirement emergency.

It is a test of whether the plan was built to handle one.

If the plan assumed markets would only go up, a fall is a problem.

If the plan assumed falls would happen and built in ways to absorb them, a fall is uncomfortable — but manageable.

The difference between those two situations is almost entirely about what was done before the fall, not during it.

Sequencing risk explained

Sequencing risk — sometimes called sequence-of-returns risk — is the risk that poor investment returns early in retirement have a disproportionate impact on how long the fund lasts.

Two people can experience the same average investment return over 20 years and end up with very different outcomes, depending on whether the good years came early or late.

The person who experiences strong returns in the early years and poor returns later is in a much better position than the person who experiences poor returns early and strong returns later — even if the average return is identical.

This is because withdrawals taken during the early poor-return years deplete the fund from a lower base. There are fewer assets to benefit from the subsequent recovery.

We introduced sequencing risk in the previous guide:

How Long Will My Pension Last in Retirement?

The pound-cost ravaging effect

During accumulation, regular contributions into a falling market can be beneficial — you buy more units at lower prices. This is pound-cost averaging.

In drawdown, the reverse can apply. When you withdraw a fixed amount from a falling fund, you sell more units at lower prices to raise the same cash. If the fund subsequently recovers, you have fewer units to benefit from that recovery.

This is sometimes called pound-cost ravaging.

The effect is most damaging when large withdrawals coincide with significant falls, particularly early in retirement when the fund is at its largest and the retirement is at its longest.

Does a fall have to affect my income?

Not necessarily — and this is an important point.

A fall in the invested fund only directly affects income if you need to withdraw from the fund during the fall. If you have other sources of income or accessible cash reserves, you may be able to maintain your standard of living without touching the invested fund while it recovers.

This is one reason why the structure of retirement income — not just the size of the pension fund — matters so much.

What if I have guaranteed income?

Guaranteed income — from State Pension, defined benefit pensions or annuities — is not affected by investment market falls. It continues regardless of what markets do.

If guaranteed income covers essential expenditure, a market fall may not require any change to your standard of living. The drawdown fund can be left to recover while guaranteed income covers the bills.

This is one of the strongest arguments for understanding your guaranteed income position before deciding how much to rely on drawdown.

We covered the interaction between guaranteed income and drawdown in:

Pension Drawdown or Annuity: Which Is Better?

What can I do when markets fall?

The most useful responses to a market fall depend on your circumstances, but they generally include:

• Reviewing whether withdrawals can be reduced or paused temporarily;
• Drawing on cash reserves or other accessible assets rather than the invested fund;
• Checking whether guaranteed income covers essential expenditure without needing drawdown;
• Reviewing the investment strategy to ensure it remains appropriate for your needs;
• Avoiding reactive decisions — particularly switching to cash after a fall.

The most effective responses to a market fall are usually those that were planned before the fall happened — not improvised during it.

What should I not do?

The most common and costly mistake during a market fall is switching the pension fund to cash.

Switching to cash after a fall locks in the loss. The fund does not benefit from any subsequent recovery. If markets recover — as they have historically done over time, though past performance is not a reliable guide to the future — the fund misses that recovery entirely.

The instinct to "stop the bleeding" is understandable. But acting on that instinct at the wrong moment can turn a temporary fall into a permanent loss of value.

Other things to avoid during a market fall:

• Increasing withdrawals to "get money out before it falls further";
• Making significant changes to investment strategy based on short-term market movements;
• Assuming the fall is permanent before it has had time to recover.

Steve's observation

The worst retirement decisions I have seen were not made in calm markets.

They were made in falling ones.

The panic is real. The instinct to act is real.

But the plan — if it was built properly — already accounted for the fall.

The job during a market fall is usually not to do something dramatic. It is to hold the plan.

How investment strategy can help

The investment strategy within a drawdown pension can be structured to reduce the impact of sequencing risk.

Common approaches include:

These are general approaches, not recommendations. The appropriate strategy depends on individual circumstances, income needs and risk tolerance.

A simple illustration

Consider two people, both with a £300,000 drawdown fund, both withdrawing £15,000 a year.

In year two, markets fall 30%. Both funds drop to around £200,000 before withdrawals.

Person A has no other income and continues withdrawing £15,000 from the invested fund. The fund is now providing 7.5% of its value each year — a significantly higher withdrawal rate than before the fall.

Person B has State Pension covering essential expenditure and a cash buffer. They pause drawdown withdrawals for 18 months while the fund recovers. Their standard of living is unchanged.

Same fall. Very different outcomes. The difference is not the investment — it is the structure of the income plan.

This illustration is not a forecast or recommendation. It is showing that the impact of a market fall on retirement income depends heavily on the plan around the pension, not just the pension itself.

What about a prolonged downturn?

A short, sharp fall is one scenario. A prolonged period of poor returns is another — and in some ways more challenging, because the strategies that work for a short fall (such as drawing on a cash buffer) may not be sufficient for a multi-year downturn.

In a prolonged downturn, the key questions become:

• Can withdrawals be reduced for an extended period?
• Is there sufficient guaranteed income to cover essential expenditure?
• Does the investment strategy need to be reviewed?
• Is the overall plan still sustainable, or does it need to be restructured?

These are not questions with easy answers. They are questions that require a plan — and a plan that is reviewed regularly enough to identify problems before they become irreversible.

What should I do next?

To build a drawdown plan that can absorb investment falls, establish:

• How much guaranteed income you have from State Pension, defined benefit pensions or annuities;
• Whether that guaranteed income covers essential expenditure without needing drawdown;
• Whether you have accessible cash reserves that could cover income needs during a market fall;
• What your current withdrawal rate is as a percentage of the fund;
• Whether your investment strategy is appropriate for your withdrawal needs and risk tolerance;
• When you last reviewed whether the plan remains sustainable.

Before making significant decisions about drawdown strategy or investment approach, establish your full income picture including guaranteed income sources, your withdrawal rate, and whether the plan has been stress-tested against realistic market scenarios. If significant fund values, multiple income sources or complex circumstances are involved, regulated financial advice can help build a plan that is designed to hold together across a range of outcomes.

The Open Door Wealth view

Markets will fall. That is not a risk to be eliminated — it is a reality to be planned for.

The question is not whether your retirement will include a market fall. It almost certainly will.

The question is whether your plan was built knowing that — and whether it has the structure to absorb it.

Guaranteed income that covers the essentials. A withdrawal rate that leaves room for the fund to breathe. An investment strategy that matches the income need. A cash buffer that buys time. A plan that gets reviewed.

None of those things prevent a market fall. But they change what a market fall means for your retirement.

That is the difference between a plan that survives a fall and one that doesn't.