Income Drawdown: New report shows effect of falling gilt yields


A new report from MGM Advantage, a provider of retirement solutions, has shown just what a devastating effect falling gilt yields are having on the income of many Income Drawdown investors.

Falling gilt yields and Income Drawdown

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The maximum income which can be taken from an Income Drawdown plan, also known as Capped Drawdown, is set in line with gilt yields. The rate is set by the Government Actuary’s Department, it is therefore known as the GAD rate, and also takes into account your age and gender.

Over the past few years gilts have become increasingly popular with the UK being seen as a safe haven and somewhat shielded from the crisis in the Eurozone. With increased demand comes a rise in price but therefore a fall in the gilt yield, which has had a knock on effect on the maximum income which can be taken from an Income Drawdown plan.

The gilt yield, to which the GAD rate is pegged, has fallen from 5.25% five years ago to 2.5%; a drop of over 50%.

In addition the government also recently reduced the maximum income available from 120% of the GAD rate to 100%.

Finally, many Income Drawdown investors have been hit by falling fund values due to volatile stockmarkets.

Income Drawdown investors have therefore had to contend with a triple blow to their retirement income, as is clearly demonstrated by the research by MGM Advantage.

Reduced income from Income Drawdown plans

Income Drawdown plans have to be reviewed periodically, this used to be every five years, however has now changed to every three years before the age of 75 and annually from 75 onwards. It is only at these reviews that the full effects of lower GAD rates, falling fund values and the change in maximum income level from 120% to 100% of GAD can be fully seen.

MGM Advantage has calculated that retirees whose Income Drawdown plans have grown by 1% (after charges) will see a cut in income of a massive 55%. If a 3% growth rate had been achieved then the income would still fall by 49% and even an investor who had achieved 7% would see a fall in income of around a third.

Such a significant drop in income is likely to cause financial hardship to many pensioners, whose options include accepting the fall and hoping the maximum income level will rise at future reviews, buying an Annuity or Enhanced Annuity or switching to an alternative retirement product such a Fixed Term Annuity.

Andrew Tully of MGM Advantage said: “Customers face the prospect of dealing with a huge hit on their income. Those reaching reviews soon are likely to be the worst hit, as drawdown gilt yields peaked in July 2007.”

Tully continued: “As people in drawdown are getting older there are a host of viable exit strategies. It may make sense to continue in drawdown, but it may also make sense to consider the newer options on the market including investment-linked annuities, which offer certain guarantees and enhanced rates for those with medical or lifestyle conditions.

“People should not feel trapped in drawdown, as other options are available, but seeking professional financial advice is critical.”

Our team of Independent Financial Advisers in Nottingham are experienced in developing retirement income strategies for clients the length and breadth of the UK; as well as advising people already in Income Drawdown.

If you are approaching retirement or have an existing Income Drawdown plan and would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email