You are right to be concerned about your future income and the value of your fund. If you maintain your current income level with a falling fund value, it will become more difficult for the fund value ever to re-establish itself in the future.
We must not forget that a 20 per cent fall in value needs a 25 per cent increase to return to its original value. If, during that period, you are withdrawing, say, 6 per cent of your fund, then, as the value of the fund falls by 20 per cent, the 6 per cent represents 7.5 per cent of the lower fund value.
For income drawdown before age 75, more correctly called unsecured pension, the default situation is that a review has to take place at least every five years. When a review takes place, a factor is produced at that time based on Government tables, economic conditions and your age.
This factor is then applied to the value of your fund at that time to produce a maximum level of income that can be paid until your pension is next reviewed.
You are at liberty at any time to draw down an amount varying between nothing to the maximum figure in each 12-month period from the review date. Any amounts unused in a 12-month period cannot be used subsequently.
Naturally, a falling fund will mean that at any review time, the amount of income available would reduce.
Economic conditions can conspire for the factor to move up or down and, under normal conditions, you should expect the factor to move up or down in line with annuity rates.
The end result is that, at present, with falling values, if a revaluation took place, you can expect the maximum income available to you to fall. In times of plenty, you could ask for a review to take place at the next anniversary and, on the basis the conditions work in your favour and your fund has increased, then you can anticipate your maximum income for the following five years to be increased.
Other events can trigger a review. You, as the member of the scheme, can ask for a review at each review anniversary date. If you do so, you are then bound by the new limit and you then put in place a new five-year period.
If, following divorce, a pension-sharing order is placed against your pension scheme in drawdown, then, from the beginning of the next scheme year, a new drawdown limit will apply to the pension that remains with you. Crystallising additional benefits in the form of more drawdown or purchasing an annuity also triggers a review.
As you move through age 75, the rules change again. Unsecured pension ceases at 75 with the income drawdown being replaced by what is known as alternatively secured pension.
The rules concerning Asp differ greatly. The maximum annual income entitlement in Asp will be calculated by applying a new income factor at your 75th birthday. The factor at this date will produce a maximum income roughly 25 per cent less than that applicable the year before. The Government has some strange reason to believe this would prevent you from exhausting your pension fund.
The minimum income also increases from nothing to a little over half the maximum amount. From then on, the maximum annual income is reviewed on an annual basis relative to the fund value each year.
Unlike unsecured pension, where the factor will increase with age, in Asp the factor is based on the calculation at age 75, irrespective of your actual age. All this complication conspires to restrict the maximum income available to you after 75.
It is important to review your situation continually while drawing down income from a pension fund. Drawing down income is always a high-risk strategy with the alternative being security and guarantees offered by purchasing an annuity.
Do not forget that at any time, whether in unsecured pension or alternative secured pension, you have the ability to use some or all of your pension fund to purchase an annuity. We currently have the strange anomaly that, with all the bad economic conditions, non-escalating annuities are at a high level that has not been seen for many years.
Richard Jacobs is managing director of Richard Jacobs Pensions & Trustee Services