Money Marketing reported in March that the Bank of England’s quantitative easing programme and bank rate at an all-time low of 0.5 per cent had pushed down gilt yields, causing a negative impact on people taking income drawdown.
The Government Actuary’s Department rate for drawdown is calculated each month using gross redemption yields on UK gilts as a basis and this income is locked in for five years.
The rate for March was 4 per cent, which equates to a maximum income of £7,200 a year for a man aged 60 with a pension with a fund of £100,000, but April’s yield dropped to 3.25 per cent – the lowest since drawdown was introduced in 1995. This GAD rate only allows a maximum income of £6,600 on the same basis of a 60-year-old male with a £100,000 fund.
But the figures for May, which were released last week, are more promising, increasing the GAD rate to 3.75 per cent which allows a maximum income of £7,080.
William Burrows Annuities director Billy Burrows says: “This shows how unfair the calculation for drawdown income is. Anybody considering taking the maximum income from drawdown now will be greatly disadvantaged compared with someone starting drawdown in March and someone who will start in May.
“GAD rates are important because they set the income limit for the next five years. The conclusion is that investors should be paying extremely close attention to the timing for the start of drawdown income.”
Hargreaves Lansdown pensions analyst Nigel Callaghan says: “If investors can wait for another month to lock in their income, then they definitely should but taking maximum income is rarely a good idea, particularly in volatile markets.”