Income drawdown ‘suffering significantly’ from recovery plans

Pensioners funding their retirement through income drawdown are bearing the full impact of the Bank of England's quantitative easing as falling gilt yields continue to drag down people's incomes, according to Prudential.

Since the Bank of England announced on 5 March that it was to inject £75 billion into the UK economy with the purchase of corporate and government bonds, the yield on 15-year gilts used to calculate the annual amount an individual can take from a pension fund has fallen to 3.25 per cent, compared to 4.25 per cent a year ago and 4.50 per cent in 2007.

Similarly, individuals buying guaranteed annuities have seen rates fall by 10 per cent since the middle of last year and incomes from drawdown and conventional annuities have fallen significantly.

Bewildering time for pensioners

"With the economy in such a volatile state right now and with no concrete guarantee that we won't see further swathes of quantitative easing in the future, retired people are suffering significantly and those approaching retirement are in a bewildering position," said Vince Smith-Hughes, Head of Business Development at Prudential.

"Falling gilt yields mean less money for individuals approaching retirement considering income drawdown and they may begin to feel a bit like the walls are closing in on them as far as their retirement income options are concerned. It's also a challenging time for advisers.

"But there are options. We've spoken to a lot of advisers about the current situation and one solution that has been identified is for individuals to look at annuities which provide a flexible income, like our Income Choice Annuity. This lets people choose their starting income and change it over time to suit their needs. It's also not bound by some of the rules for income drawdown products. Though there are many other considerations at present the Income Choice Annuity may well give a higher level of maximum starting income."

3 per cent more income

Prudential is currently running an introductory offer on its Income Choice Annuity, which was launched on 9 March this year.

Customers who apply for a Prudential Income Choice Annuity on or before 30 April will receive an additional 3 per cent on their starting income and ongoing secure level of income - this is the basic minimum below which the individual's income will not fall.

Income Choice Annuity key features

Choose an income level from a set income range

£10,000 minimum purchase price (after tax-free cash) - no maximum limit

Provides a guaranteed minimum secure level which means a minimum income will be paid out, no matter what, and can increase each year

Option to review annually and potentially change income every two years as needs change

Payment guarantee period, joint life and lifestyle/enhanced life options available

Can provide an income higher than a conventional annuity but without the full exposure to risk associated with a unit-linked annuity

Can accept protected rights and non-protected rights monies

Adviser agrees commission with the client - can be either initial or annual, or a combination of both

Monthly, quarterly, half yearly or yearly payment options in arrears or advance

Linked to Prudential's with-profits fund providing the potential for growth, and with a ‘smoothed' return feature, eliminates the effects of peaks and troughs in fund performance.