Capped drawdown to suffer over falling gilt yields

Falling Yield Rates to Affect Capped Drawdown, Warned Rowanmoor

Falling Yield Rates to Affect Capped Drawdown, Warned Rowanmoor

Pensions provider Rowanmoor said government spending cuts and falling yields on gilts will reduce the retirement income amounts that can be drawn significantly, hurting pensioners’ income. The yield on 15 years gilts fell below 3.5 per cent last week, prompting the provider issue the warning.

The recent drop in rate comes after the government implemented changes in April this year when it reduced the income from unsecured pensions to 100 per cent under capped drawdown from the existing 120 per cent of the Government’s Actuary Department Rate (GAD).

The provider said since April 2006, only once yields to calculate maximum income fell below 3.5 per cent to 3.25 per cent in April 2009. The highest yield was calculated at 5.25 per cent during the period, the provider said, adding that a 1 per cent drop in gilt yields drive income down by 10 per cent for a 70 year old individual.

If the current rate continues till mid-august, the gilt yields to be used for September review, including those taking benefits for the first time, will be 3.25 per cent. Lower rates in turn, will bring down the maximum income that members’ can withdraw from their pension funds each year, said David Downie, director of actuarial services at Rowanmoor.

“Pensioners who have been in income drawdown from their pensions for some time will suffer the most – these changes, coupled with poor investment returns mean that those who started taking income five years ago have already seen incomes reduced by over 50 per cent,” said Mr. Downie.

“The combination of changes in government regulations, poor pension fund returns and falling gilt yields will continue to result in significant reductions in incomes for many pensioners,” he added.

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