It was recently revealed that some pensioners could see a drop of 55% in their retirement income, all because they chose against buying an annuity with their pension pots. These people had decided to go for ‘income drawdown’, which allows them to keep their pension investment and take an income from it at the same time.

The problem that these people are facing is from the impact sustained from gilt yields, which have been sliding steadily lower over recent months. Yields on gilts — or long-term government bonds — have suffered because of the nervousness felt by investors who were originally in the equity market. They have now moved into the bond market, which they hope offers them more certainty with their investment.

GAD rate

Pensioners choosing drawdown products have had to cope with below-par investment performance, because the stock markets are still volatile, years after the global financial crisis. One other reason for the reduction in income is a change in rules, which has not helped these retirees.

Drawdown investors are restricted to the income they can receive from their pension pots because it is based on the gilt rate known as the GAD rate, set by the Government Actuary’s Department. Going back five years, this rate hit its highest mark when it reached 5.25%; since then it has dropped to 2.5% which is a decline of 52%.

Any pensioner who took out an income drawdown plan five years ago must have it reviewed as of now. This will allow their maximum income to be calculated, which will be based on investment returns. The bad news for these people is that some could be looking at their income being halved while prices of food, energy, and other basic needs continue to rise.

Annuity

According to the retirement income specialist MGM Advantage, any pensioner whose funds grew by 1% would face a 55% cut in their old age income. Anyone realising returns of 3% would be looking at a 49% fall.

This means that a 62-year old man who invested £100,000 into a drawdown plan during 2007 would have received £8,640 per year as an income based on the GAD rate that was set then. But in the event  the individual’s funds grew by 1%, the maximum income he would receive would fall to the low of £3,923 after he goes through with reviewing his drawdown plan.

The bad news doesn’t end there, since if this man had purchased an annuity instead of an income drawdown then his original income would have been fixed for his entire retirement.

 

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