It is now several years since we set up my self-invested personal pension with income drawdown. I thought I understood the risks at the time but I am now extremely concerned about how the latest stockmarket falls are affecting my funds and, probably more important, my future income. Are there any steps I should be taking?
By electing to draw income from your personal pension instead of buying an annuity, you are immediately taking a step into the unknown. While you always retain the right to buy an annuity with all or some of your fund, annuity rates remain as expensive as ever.
By electing to draw down an income, you are gambling against the system. You are taking the risk that, by investing your fund, you will achieve a better return than that given by annuity providers.
Your main reason for taking income drawdown, as with many of my other clients, was to retain access to the fund for as long as possible, particularly having regard to death benefits. But, regardless of the benefits available to you through drawdown, you are quite right to be concerned about recent events.
It is very interesting to note that Standard Life has stated that it will not allow its drawdown pensions to be invested in its with-profits fund. One of the main reasons is that Standard Life believes that, in electing to draw down an income from your fund, you must invest in such a way that you will achieve a return greater than average. With-profit funds, by their very nature, will not beat the system.
We constructed and continue to monitor the investment strategy of your Sipp. You have a broad international mixture of equity-based investments, both directly and through investment funds. In addition to this, you have commercial property with a long-term lease generating a rental income of 10 per cent a year.
The overall value of your Sipp has fallen by more than 25 per cent in the last 18 months. This is definitely something to be concerned about. In the long term, on the understanding that equity values will return, the overall effect may not be as bad as feared today. However, against this, there are two negative points.
You are currently taking an income from your fund of 7 per cent of its value two years ago. We therefore need to make good the increasing drain on the fund that drawdown has created.
Every three years, we are required to undertake a formal valuation of your fund and calculate the maximum drawdown income for the next three years. You are able to take anything between 7 and 35 per cent of that figure. If your fund remains 25 per cent lower than its starting value, then this alone will mean that, at the next review, the maximum income you will be able to draw down from your pension will be reduced.
You also need to be aware that, if inflation and interest rates but, more important, the yield from Government securities fell, then this would also conspire to reduce the maximum income that would be available. If inflation, interest rates and Government gilt yields increased, this would increase the three-year factor.
The only way you can guarantee your income is by purchasing annuities, in which case you would lose access to the fund. By continuing with income drawdown, your investment strategy must take into account the higher risk involved. Your stockbrokers feel that there is little that can be done at this current moment from an investment point on view. Income drawdown carries risk to both your capital and your income. If you now feel that this risk is unacceptable, then we must change the investment strategy or look at annuities.
The only problem is that you would be looking to move out of equity-based investments at a time when they are at an extremely low point. While I am not at all happy with current stockmarket conditions, I do feel that there is little more that we can do other than continue to monitor the situation and hope that markets improve.