Pension incomes fall by 35% as gilt yields drop
Sunday, 20 November 2011 01:09
A dramatic fall in gilt yields has seen the amount that pensioners can drawdown in retirement fall to a record low.
This means that some people could potentially lose thousands of pounds in anticipated annual income. This is another fallout effect of the euro debt crisis. Investors have fled the eurozone to the relative safety of the UK bond market. This has caused the yields on UK gilts to fall which dictates the income that arises from an annuity when a pensioner is ready to cash in their pension pot for an annuity.
The yield on 15-year government bonds fell to just 2.5 per cent last week. This yield is used to calculate limits for income drawdown, which involves taking some of the investment as an income whilst keeping the fund invested. The rate of 2.5 per cent will be used to calculate income due for pensioners entering drawdown now and those due for an income review.
New pension rules combined with the fall in gilt yields have provided a double blow to UK pensioners. In April, the government changed the rules on capped drawdown, cutting the maximum amount pensioners can draw from their pot to 100 per cent of a comparable annuity rate from 120 per cent.
The government has also revised the tables used by its actuary department that calculates drawdown rates to take account of increased life expectancy. This means that the maximum annual income that can be taken via an annuity would fall by around 35 per cent according to research by Hargreaves Lansdown.
Some advisors are recommending to customers to consider alternatives to capped drawdown schemes such as flexible drawdown schemes which were introduced this year. These products don’t impose time limits on the amount of income that can be drawn from a pension fund if savers can show that they have at least £20,000 in other retirement income.
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