Stock Market Crash: What Happens to Your ISA and Pension

What a stock market crash is

A stock market crash is a rapid, steep fall in share prices. There is no fixed definition, but a drop of 20% or more is commonly described as a crash. Falls in individual share prices feed through to the funds, trackers and exchange traded funds (ETFs) that hold them, so the value of a diversified portfolio usually falls alongside the wider market.

Crashes are often sudden and can unfold over days rather than months. Black Monday, on 19 October 1987, remains a reference point: the FTSE 100 fell by more than 20% over two trading days. More recently, the FTSE 100 fell by about a third between February and March 2020 as the pandemic spread. In both cases the fall was sharp, widely reported and unsettling for anyone holding investments. A crash is different from a normal market correction, which is a smaller and more common pullback. Because funds and trackers hold many shares at once, a broad market fall shows up across most equity holdings at the same time, even where an individual company has done nothing wrong. Understanding this helps separate a market-wide event from a problem with one particular investment.

What happens to a stocks and shares ISA in a crash

The holdings inside a stocks and shares ISA fall in value during a crash, but the ISA wrapper itself is unaffected. The tax-free status stays whatever the value of the account. Losses are only realised if investments are sold, so a fall on paper is not a permanent loss unless units are sold at the lower price.

An ISA is a tax wrapper, not an investment. The money inside is invested in shares, funds, trackers or ETFs, and those assets move with the market. When prices fall, the account balance falls with them, but the wrapper continues to shelter any growth from tax in the same way as before. The important distinction is between a paper loss and a realised one. Selling after a fall turns a temporary decline into a locked-in loss, and it also removes the chance to benefit from any recovery. For savers who contribute regularly, a falling market means each contribution buys more units at a lower price, an effect sometimes called pound cost averaging. The ISA allowance is £20,000 per tax year (2026/27), so regular contributions can continue within that limit regardless of market conditions.

What happens to your pension in a crash

Defined contribution pensions are invested, so their value falls in a crash. Defined benefit pensions pay a set income that does not depend on fund value for the member, and the State Pension is not invested in the stock market. Lifestyling and target-date funds move savers into lower-risk assets as retirement approaches.

Most workplace and personal pensions today are defined contribution schemes, where the pot is invested and the eventual income depends on how those investments perform. In a crash, the pot value drops, but as with an ISA the loss is only fixed if investments are sold at the lower price. Someone close to retirement has less time to recover, which is why many schemes use lifestyling or target-date funds. These gradually shift savings from shares into lower-risk assets such as bonds and cash as the retirement date nears, reducing exposure to a late crash. Defined benefit, or final salary, pensions work differently: the member receives a set income based on salary and service, and the scheme's funding position is the employer's and trustee's concern rather than the member's. The State Pension is a government benefit and is not affected by share prices at all.

Cash ISAs and savings in a crash

Cash ISAs and ordinary savings accounts are not linked to the stock market, so a crash does not reduce their balance. Deposits are protected by the Financial Services Compensation Scheme up to the limit per banking licence. Interest rates may change as the Bank of England responds to the economy.

Money held in a cash ISA or a savings account does not rise and fall with share prices. The balance stays the same, apart from interest added, so a market crash has no direct effect on the capital. Deposit protection applies through the FSCS for cash held with banks and building societies, up to the covered limit per person per banking licence. That protection covers the failure of the institution, not investment losses. Interest rates are a separate matter. The Bank of England sets the base rate with an eye on inflation and economic conditions, and it may adjust policy in response to a downturn. A change in the base rate can feed through to savings rates over time, which affects the return on cash but not the safety of the capital itself. Cash therefore offers stability during a crash, though it does not participate in any market recovery.

What FSCS protection covers

The Financial Services Compensation Scheme protects against the failure of a financial firm, not against market losses. For investments it covers up to £85,000 per person per firm. If share prices fall, the FSCS does not compensate the investor for that fall.

This is one of the most commonly misunderstood points about investing. The FSCS steps in when a regulated firm fails and cannot meet its obligations, for example if an investment firm becomes insolvent and client assets are missing. It does not act as insurance against a bad market. If a fund or share price drops, the loss sits with the investor, and no compensation is payable. The same principle applies to cash: deposit protection covers the failure of a bank or building society, not poor returns or inflation eroding value. Knowing the difference matters when choosing where to hold money. Protection limits should be checked against current FSCS guidance, and holdings spread across firms or banking licences where balances are large. The scheme is a backstop for firm failure, not a shield against the normal risks of investing.

How past UK crashes recovered

Past UK market crashes, including 1987, 2008 and 2020, were followed by recoveries over different periods. The length of recovery varies and cannot be predicted in advance. Past performance is not a guide to the future, and no recovery is guaranteed within any particular timeframe.

History offers context rather than reassurance. After Black Monday in 1987, after the financial crisis of 2008 and after the pandemic sell-off of 2020, markets eventually recovered, but the time taken differed in each case. Some recoveries were measured in months, others in years, and the path was rarely smooth. An investor who sold during a fall and stayed in cash missed part or all of the rebound, while one who held on and kept contributing was positioned to benefit when prices rose again. The lesson is not that crashes always end quickly, because they do not, but that selling at the bottom converts a temporary decline into a permanent one. Recovery depends on many factors, including the depth of the downturn and the wider economy. Planning should assume that a recovery could take longer than expected.

Common mistakes during a crash

The most common mistakes during a crash are panic selling, stopping contributions, checking values daily and moving into cash at the bottom. Each turns a temporary market fall into a lasting loss or removes the chance to benefit from a recovery. A written plan and a long time horizon are the main defences.

Panic selling is the clearest error: it locks in the loss and often happens near the lowest point, when fear is greatest. Stopping contributions has a similar effect, because regular payments buy more units when prices are low and fewer when they are high. Checking values every day amplifies anxiety without improving decisions, since daily movements are noise rather than signal. Moving into cash after a fall crystallises the loss and means missing any rebound. A better approach is to decide in advance how much risk is appropriate, keep an emergency fund outside investments, and review the portfolio on a schedule rather than in reaction to headlines. Investors who understand that volatility is part of investing, and who hold a diversified mix suited to their time horizon, are better placed to ride out a crash without making decisions they later regret.

Frequently asked questions

Do I lose money in my ISA if the stock market crashes?

A stocks and shares ISA falls in value with the investments inside it, but the loss is only realised if the investments are sold. A cash ISA is not invested in the stock market.

Is my pension safe in a stock market crash?

A defined contribution pension can fall in value because it is invested. A defined benefit pension pays a set income and the State Pension is not invested in shares.

Does the FSCS protect me from a stock market crash?

No. The Financial Services Compensation Scheme covers up to £85,000 per person per firm if an authorised investment firm fails, not falls in the value of investments.

Should I sell my investments before a crash?

Crashes are not reliably predictable. Selling after a fall turns a paper loss into a real one. Kael Tripton does not give personal advice; a regulated financial adviser can.

When did the FTSE 100 last crash?

The most recent sharp fall was in February and March 2020, when the FTSE 100 lost about a third of its value as the pandemic spread.