After years of Volatility in global markets, many UK savers are asking the same question: how much damage could another big crash do to my pension? For those still many years from retirement, time is usually a healer. For those within five to ten years of stopping work, however, sudden market falls can dramatically reduce the income that a pension pot can support.

Industry experts call this 'sequence-of-returns risk', and it is one of the most underestimated threats to a comfortable retirement.

What is sequence-of-returns risk?

Sequence-of-returns risk is the danger that poor Investment returns just before or in the early years of retirement will leave a saver with less money for the rest of their life, even if average long-term returns end up looking acceptable. Selling investments at depressed prices to fund income can crystallise losses that may never be recovered.

How can savers reduce pension risk before retirement?

A common approach is to gradually shift from higher-risk investments such as equities into lower-risk Assets like bonds or cash as retirement approaches. This is often called 'lifestyling' or 'glide path' investing and is the default in many workplace pension schemes.

However, lifestyling can be too aggressive or too cautious for individual circumstances. Savers should check their fund choice and consider whether the level of de-risking matches their retirement plans.

Should everyone move into bonds?

Not necessarily. Some retirees who plan to stay invested for 30 years or more may still need a meaningful Equity allocation to keep up with Inflation. Bonds can also fall in value when interest rates rise, as savers saw in 2022.

What role can cash play?

Holding a 'cash buffer' of one to two years' worth of expected pension withdrawals can help retirees avoid selling investments during a downturn. With UK interest rates higher than they were for most of the 2010s, cash savings rates have become more attractive, although they may not keep up with inflation.

Could Diversification help?

Diversification across asset classes, regions and sectors can reduce the impact of any single market falling sharply. Multi-asset funds, global trackers and balanced portfolios can offer ready-made diversification for those who do not want to build their own portfolio.

Property, infrastructure and alternative assets may also play a role, although their fees and Liquidity should be checked.

Should you delay retirement after a crash?

Delaying retirement, even by a year or two, can have a powerful effect on a pension pot. It allows for additional contributions and growth, reduces the number of years the pot needs to fund, and gives investments time to recover.

What about drawdown strategies?

Flexible drawdown is popular among UK retirees, but it does expose savers to market falls. Strategies such as variable Withdrawal rates, a 'bucket' approach (using cash, bonds and equities for different time horizons), or partial annuitisation can all help manage the risk.

Why this matters now

With markets often unsettled by geopolitics, inflation worries and the AI investment cycle, the risk of a sharp fall cannot be ruled out. UK savers nearing retirement may want to review their pension investments and consider speaking with a regulated adviser to stress test their plans.

Key Takeaways

  • Market falls near retirement can have outsized effects on lifetime income.
  • Lifestyling can help but may not suit every saver's plans.
  • A cash buffer of 1-2 years of withdrawals can ease pressure.
  • Global diversification reduces reliance on any single market.
  • Delaying retirement, even briefly, can significantly improve outcomes.

Real-world examples of sequence risk

Two retirees with identical pension pots can end up with very different outcomes purely based on when markets fall. A retiree starting drawdown just before a 30% market drop could find their pot worth significantly less than expected, even after a recovery, because withdrawals lock in some of the losses.

Strategies such as building a two-year cash buffer, using bond ladders, or partially annuitising can soften this risk. Reviewing investment risk in the years either side of retirement can be one of the most important conversations a saver has with their financial planner.

Common misconceptions to avoid

  • 'I should sell to cash whenever markets fall.' Doing so locks in losses and can damage long-term outcomes.
  • 'Bonds are always safe.' Bonds can fall, as savers saw in 2022 when interest rates rose sharply.
  • 'I cannot do anything about Market Risk.' Diversification, cash buffers and gradual de-risking can all help.

A final word

Taking a measured, well-informed approach is one of the most important parts of any UK retirement plan. Regularly reviewing pensions, ISAs and other savings, alongside major life changes, helps ensure that your long-term goals stay on track. Working with a regulated financial adviser, and consulting trusted resources such as MoneyHelper and Pension Wise, can make complex decisions easier to navigate.