How should you adjust your withdrawals during a market downturn?

01 Why cutting works better than reallocating

A withdrawal is the only variable in a drawdown plan that you control completely. Returns are not yours to set, charges are largely fixed once chosen, and reallocating after a fall locks in the loss you were trying to avoid. The withdrawal is the lever that responds immediately and predictably.

The mechanism is the one behind pound-cost ravaging: fewer pounds withdrawn means fewer units sold at the depressed price, and those units stay in the portfolio for the recovery. The effect is largest exactly when the fall is largest.

Reallocating does the opposite. Moving from equities to bonds after a 25% fall converts a paper loss into a realised one and reduces the portfolio's capacity to recover, which is why it so often shows up in the accounts of retirees who ran out early.

Source: Retirement income market data

02 How big a cut, and for how long

Around 10% of the withdrawal is the usual figure, held for two or three years or until the portfolio recovers a defined level. Deeper cuts add progressively less protection while imposing real hardship, and the point is to reduce the selling pressure rather than to eliminate it.

On a £24,000 withdrawal that is £2,400 a year — a deferred holiday, a postponed car replacement, a year without the kitchen. That is the practical shape of the cut, and it is only available to a household whose essential spending is covered by something else.

The duration matters as much as the depth. A cut applied for one year and reversed immediately does very little; the value comes from not selling units through the whole of the depressed period.

One refinement is worth adding: cut the discretionary part of the withdrawal rather than applying a flat percentage to everything. A household drawing £24,000 of which £16,000 is essential can take the whole £2,400 out of the £8,000 of discretionary spending, which is a 30% cut to holidays and a 0% cut to the heating bill. That is a much easier decision to keep to than an across-the-board reduction.

On the defaults above, the worked example shows 320 units. Cutting by 10% leaves 320 more units in the portfolio for the recovery, at a cost of £2,400 of income for the year.

Source: Plan your retirement income

03 Defining the trigger in advance

A rule that requires judgement in the moment will not be applied, because the moment is frightening and every instinct argues for doing something dramatic instead. So the trigger has to be mechanical: a portfolio fall of more than 15% from its previous high, or the withdrawal exceeding a set percentage of the current balance.

Guyton-Klinger guardrails formalise this with both an upper and a lower trigger — the withdrawal is cut when it rises above a threshold share of the pot and raised when it falls below another. The specific thresholds matter less than having them written down.

Write the rule while you are calm, put it with the plan, and treat it as binding. The purpose of a written rule is to remove the decision from the year in which you are least able to make it well.

Source: FCA consumer information

04 The floor that makes cutting possible

A household cannot cut a withdrawal that is paying for heating. The precondition for a flexible strategy is that essential spending is covered by income that does not vary — the State Pension, a defined benefit pension, or an annuity bought for the purpose.

That is why the sequencing of retirement decisions matters. Establishing the guaranteed floor first turns the portfolio withdrawal into discretionary spending, and discretionary spending can be adjusted. Skipping that step produces a plan that requires flexibility and cannot deliver it.

It is also why the size of the floor is worth deciding deliberately rather than defaulting to whatever the State Pension happens to be.

Source: The new State Pension

05 What to do the year it happens

Apply the rule. Do not reallocate, do not stop contributions to the cash buffer, and do not sell to cash 'until things settle', which is the decision that converts a recoverable fall into a permanent one.

Take the year's income from the cash buffer if there is one, cut the withdrawal by the amount the rule specifies, and rebuild the buffer when the portfolio recovers its trigger level. Then leave the portfolio alone.

Review the plan afterwards rather than during. The useful question after a downturn is whether the starting rate was too high, and that is answered against the balance you have now rather than the one you had before.

It is also worth recording what you did and why. A short note in the plan saying the trigger fired in a named year, the cut applied, and the level at which the withdrawal was restored turns an anxious improvisation into a documented procedure. The second time the trigger fires — and over a thirty-year retirement it will — that note is what stops the decision being relitigated from scratch.

Source: MoneyHelper: pensions and retirement