Figures show drop in pensioner income as Gilt yields hit record low
Low-cost platform provider A J Bell is calling attention to the case for change to drawdown rules to protect pensioners from retirement income erosion as a result of record low gilt yields and Government policy.
The situation worsened this week when the Gilt yield used to calculate drawdown limits dropped to a record low of 2.50%. The rate will be used for pension savers entering drawdown, or having their maximum income reviewed in December.
The company has been campaigning for a review of the link between Gilt yields and pension income, which has led to declining income drawdown levels as yields have fallen dramatically this year.
The decline in Gilt yields means a pensioner whose drawdown income is reviewed in December may potentially end up seeing their maximum income drop by more than 25% a year compared to the previous maximum.
The Coalition's decision this year to cut annual maximum drawdown from 120% to 100% of a comparable annuity - a policy that has been called into question by A J Bell - has worsened the situation for people in drawdown.
Billy Mackay, A J Bell Marketing Director, said: "For a 60 year old male with £300,000 going into drawdown on 1 December 2006 the maximum income was £22,320
"When their pension benefits are reviewed in December, even if their pension fund is still worth £300,000, they will see their maximum income drop to £16,800, almost 25% less income. If their pension fund has fallen in value the drop in pension income could be even greater.
"This drop in income will come as a shock to many especially when you consider the effect of rising inflation over the past five years, the drop in real income is far worse.
"We have urged the Coalition this year to re-instate the 120% factor and to review the link between Gilt yields and pension income, and will continue to press the case. We hope this latest drop in the Gilt yield and the negative impact it will have on pensioners' incomes will give them reason to look at the issue again."
Inflation is making the situation even worse. Despite the drop this week in the headline Consumer Price Index inflation from 5.2% to 5%, pensioners continue to be hit particularly hard by rising prices because their incomes tend to be more fixed than the working population.
According to figures recently published by Saga, over four years between September 2007 and October 2011, there has been an 16.4% rise in the cost of living for people aged between 50 and 64, a 16% increase for 65 to 74-year-olds and 16.7% increase for people aged 75 and over. The average rise in the cost of living for the general population was 15.5%, based on CPI.
Mackay added: "We will continue to campaign on this as we believe that the Government are failing to appreciate the strength of feeling on this issue. Falling pension incomes and current inflation levels are taking a heavy toll on pensioners' lives."