Many pensioners are facing huge drops in their retirement income from next month, as gilt yields fall to the floor level put in place by HM Revenue & Customs in December 2011.
Falling gilt yields are a precursor of weaker annuity rates, but the biggest impact will be felt by those in drawdown. The Government Actuary's Department (GAD) uses the 15-year yield to set the amount that can be drawn from a fund under capped drawdown. A 70-year-old male could expect to face a reduction of up to 9 per cent in income per 1 per cent reduction in gilt yields.
The plight of pensioners is made still worse by the fact that this August's rate is more than 3 full percentage points lower than the 5.25 per cent rate of August 2007. Those who took an unsecured pension in August 2007 will see a considerable drop in income at their five-year review date in August this year.
Rowanmoor Pensions, a provideer of Small Self-Administered Scheme (SSAS) and bespoke self-invested personal pensions (Sipps), says the position could potentially get worse still for male pensioners in Sipp and Family Sipp schemes from December because of the EU's gender neutrality rules. These will see mortality rates for all pensions schemes with no sponsoring employer become gender neutral - including those used by GAD to calculate income drawdown. Although nothing is yet final, the general principle will be that rates are expected to improve for females but worsen for males, who at the moment benefit financially from their shorter average lifespans.
The fall in gilt rates comes on top of changes implemented in April 2011 when the government reduced drawdown income from 120 per cent of the GAD rate under unsecured pensions to 100 per cent under capped drawdown.
David Downie, director of actuarial services at Rowanmoor Pensions comments: "As things stand currently, people should consider only drawing an amount that is sustainable given a realistic growth rate assumption and they need to be checking their drawdown pot regularly rather than simply waiting for the formal review. This is even more pertinent for males in Sipps and family Sipps when you consider the potential situation they face in December, when gender neutrality comes into play."
