Capped drawdown pensioners warned on falling income

Pensioners in capped drawdown face significant drops in retirement income because falling gilt yields are affecting the amount that can be drawn from a fund, according to Rowanmoor Pensions.

Since April 2006, the yields used in calculating maximum income have been as high as 5.25% and only once fell below 3.5% to 3.25% in April 2009.

However, as investors flocked to safe havens as the equity markets plummeted, yields on 15-year-gilts fell to 3.25% last week.

Rowanmoor warned for a 70-year-old male, a reduction of just 1% in gilt yield reduces income by 10%.

Director of actuarial services David Downie said: "If this situation continues to mid-August, the gilt yield used for reviews that fall in September, or those taking benefits for the first time, will be 3.25%. This in turn will bring down the maximum retirement income that the member can take from their pension funds each year.

"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%."

Rowanmoor said the fall in gilt yields exacerbates the reduction of the limit on how much capped drawdown pensioners can withdraw from funds from 120% of the Government Actuary's Department (GAD) rate to 100% since April.