By Matthew Kneller
In December’s Autumn Statement, the Chancellor announced that the maximum level of income for those with a Self Invested Personal Pension (SIPP) in Capped Income Drawdown will increase from 100% to 120% of the Government Actuaries Department (GAD) rate. This change is to be introduced from 26 March 2013.
Individuals taking close to the maximum level of income have seen significant falls in their pension income levels when their policy has reached its regular review date. Some individuals have seen falls of around 50%.
This drop in income has been caused by a number of factors, most notably the fall in Gilt Yields on which the GAD rates are based.
Figure 1, Historical FTSE Yields on 15 Year Gilts for Income Drawdown
Looking at Figure 1, if we assume a client going into Income Drawdown in August 2007, the Gilt Yield would have been 5.25%. Five years later when the maximum permitted level of income is reviewed and re-set, the Gilt Yield has fallen to 2.00%.
To compound the problem, equity markets around the world have had a very difficult time during that period, in particular during 2008 – 2009 and then again during the middle of 2011. Although the FTSE 100 and MSCI World indices overall are broadly positive over the five year period, the effect of making regular withdrawals will mean that many individuals will have seen a fall in the overall value of their pension fund.
Although the decision to restore the 120% limit is welcome, many commentators think that now may be a good time to sever the link between GAD rates and Gilt Yields.
Our concern is that low interest rates are already having a severe impact on retirees and this could be exacerbated, in particular if inflation comes back strongly, as some analysts are warning.
We believe that those with SIPPs in Income Drawdown should be reviewing their portfolios to ensure that they are invested as efficiently as possible. In addition, retirees should be taking stock of their other assets and sources of income to ensure that their income requirements can be met throughout their retirement.
If this is something you would like our help with, please do get in touch and we will be delighted to help.
Telephone: 01249 700402
This article contains the current opinions of the author and does not represent a personal recommendation. Information contained herein has been obtained from reliable sources but cannot be guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission from Fresh Perspective Financial Planning Ltd.