How to protect your retirement from a stock market crash

For the bulk of your working life, retirement saving is all about growth; we’re encouraged to be pragmatic about risk because we’ve got the time to ride out short-term stock market volatility.

But once you’re preparing to retire, the conversation around pensions and risk becomes increasingly nuanced.

A significant stock market correction could see the value of your hard-earned savings drop, and you may not be able to recoup these losses before you need to start taking income.

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Stock market volatility can also be particularly damaging if it happens in the early years of your retirement, when your income needs are likely to be relatively high.

But with a retirement that could span 30 or so years, you might not want to take too much risk off the table.

So, how do you prepare and strike the right balance?

Think ahead

There’s no “one size fits all” solution to pensions de-risking. But as a starting point, it makes sense to look at your overall financial position (not just your pension) and think about how a stock market correction – or crash – would impact you.

It’s also important to think about your preferred retirement income strategy: how you plan to convert your pension into income will have a significant impact on how and when you de-risk.

Income drawdown

Pension drawdown is the most flexible way to manage your retirement income. Your money remains invested in the stock market and you take out what you need, when you need it. When you die, any remaining funds can be passed on to the loved ones of your choice.

But while this gives you total control over your income, there are no guarantees.

And although stock market exposure gives you the opportunity to carry on growing your money, an extended period of volatility could mean it runs out faster.

This means investors that plan to use drawdown – or are using it already – should have a strategy to manage stock market risk.

Wholesale de-risking – where you steadily move into lower-risk assets in the years before you retire – may not be appropriate if you plan to use drawdown (something to watch for if you’re in a workplace pension and it’s using “lifestyling”).

But that’s not say some de-risking won’t be sensible, especially once you start taking income.

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Some investors will segment their pot into buckets, holding lower-risk investments (like cash, money market funds, bonds and gilts) in short- and medium- term buckets (that can be called on in the near or relatively near future) and set aside a bucket for longer-term needs (10 years-plus) that’s invested for growth in equities.

But a simpler solution can be to make sure you have significant cash savings set aside (one to three years’ income). 

Maintaining income withdrawals from your drawdown fund when stock markets are falling triggers what’s referred to as “pound cost ravaging”, which compounds your losses and limits your pot’s ability to grow.

If you can instead turn to back-up cash reserves and halt withdrawals from your pension for a period, you can reduce the pressure on your pot and give it the time it needs to recover.

Annuities

For more cautious investors, an annuity could be the ultimate way of de-risking your pension. Once purchased, you can stop worrying about the stock market for good.

Annuity sales fell off a cliff in the wake of the 2015 pension freedoms. But rising interest rates mean more retirees are once again considering them. Annuity sales rose by 4% to £7.4 billion in 2025 – the largest increase since 2014, according to the Association of British Insurers.

Today, a healthy 65- year-old could exchange £100,000 of pension savings for a guaranteed income worth up to £7,798 a year (level payments with a five-year guarantee), according to The Annuity Project. At age 70, that rises to £8,527. If you’re less healthy, you could get more.

The catch is that annuities are notoriously inflexible – especially when compared to drawdown. While payments can be inflation-linked, the starting amount is much lower. 

You also can’t amend your income, and when you die all payments (beyond any payment guarantees) will stop. As it’s an insurance policy, there won’t be a pot of unspent cash to pass on to beneficiaries when you die.

But a fixed-term annuity could provide a halfway house.

They pay a guaranteed income for a predetermined period (typically five to 10 years). At the end, you get a “guaranteed maturity amount” paid back to you. It’s then up to you what you do next.

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According to The Annuity Project, a £100,000 fixed-term annuity could pay £5,300 a year, for five years before returning £98,237. You could increase the income and take a lower maturity amount, or you could use it as investment with a guaranteed return by taking no income at all. In that case you would get £128,641 back after five years (an effective rate of return of 5.05%).

If you pass away during the term, the money will be paid to your beneficiaries.

As such, a fixed-term annuity could be an effective way of de-risking a lump sum and still earning a decent return. Or, if you plan to retire early, it could also be used to provide an income before other streams kick in, like the state pension.

But while both lifetime and fixed-term annuities can be an effective way of de-risking your pension in retirement, you’ll still need to think about risk in the run up to your purchase.

When you buy your annuity, you’ll want your pension to be worth as much as possible, so it may make sense to move some of your pot into lower risk assets (like bonds) to lock in gains and reduce the risk of losses in case there’s a stock market correction before you retire.

This will be less of a concern if you’re in a workplace pension that uses lifestyling, as this process will happen automatically. But it’s worth considering if you’ve got a self-invested personal pension (SIPP) or you selected the investments in your workplace pension yourself.

Some conservative lifestyle funds start the de-risking process as much as 15 years ahead of retirement, but how soon you start and how rapidly you move into lower-risk assets will depend on your attitude to risk and your overall financial position. 

If you have a healthy pension with income from various sources, it may be less of a worry than if you have less provision.

Getting the best of both worlds

For many retirees, a practical way to protect their retirement finances will be to use a blended approach.

For example, using an annuity to provide a baseline of guaranteed income (in addition to state pension), but leaving some invested in a balanced drawdown portfolio to manage additional expenditure and give you the opportunity to benefit from further growth over time.

This lets you lock in some guaranteed income, without totally sacrificing flexibility or removing the opportunity to enjoy some further growth.

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It’s not easy to work out the right retirement income strategy, especially during periods of economic turmoil.

But the sooner you start thinking about what you’d like to do and consider the risks that you might face, the easier it will be to plan.

And, if you aren’t sure how to proceed, or are particularly anxious about managing risk, it’s a good idea to get professional advice.