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QE2 will cut income from drawdown

Pension providers have warned that the latest round of quantitative easing will slash the maximum pension income available to savers in capped drawdown.

Standard Life head of pensions John Lawson says previous rounds of QE have concentrated on buying short-dated gilts but the Bank of England is now looking to buy medium and long-dated gilts.

He says: “Drawdown uses a 15-year gilt yield to calculate the maximum drawdown amount, so if supply is reduced as the bank buys back these gilts, the price will increase and gilt yields will fall. This could be a blow to investors as it could see a further fall in the maximum income that savers can take in capped drawdown.”

The current yield that is used to calculate the drawdown maximum is 2.75 per cent, the lowest rate since drawdown began in 1997.

Sipp provider AJ Bell has been pushing the Treasury to review the way it calculates maximum pension income levels under drawdown.

Marketing director Billy Mackay says: “The gilt yields used to calculate the maximum drawdown income are on a fairly strong downward spiral and this round of quantitative easing will only increase the likelihood of further future falls.

“We would argue that linking the maximum income to gilts is not appropriate, given the majority of clients are not sure whether they are going to buy an annuity.”



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  1. What needs to be done is for the link with those cursed GAD Rates to be broken. Hence my suggestion for a Pension Income Bond, under which the level of income would be geared to deplete the fund in its entirety over the remaining (underwritten) lifetime of the pensioner, allowing for a prudent rate of anticipated investment growth (say 5% p.a.) and an insured guarantee against either early fund burnout or life beyond the anticipated expiry age. Not a very complicated product and the insurance guarantee shouldn’t be unduly onerous, notwithstanding Solvency II.

    For example, start with a fund of £100K, deduct 5% for the cost of the lifetime income guarantee, dial in expected investment growth of 5% p.a. and you get a monthly income of £555 (£6,660 p.a.) lasting, for a husband and wife of whom the youngest is age 60 at inception, for 25 years (to age 85), with a 100% widow’s pension. Would a 63 year old (in good health) get an annuity rate of 6.66% p.a. in the current climate? Almost certainly not.

    Furthermore, the income rate could be adjusted in the future (i.e. re-underwritten) to reflect a deterioration in health (and thus reduced life expectancy).

    And why shouldn’t the Bond be governed by a Trust to enable whatever element of it remains unspent on death to pass tax free to the next generation, if only into a new or existing retirement savings plan (get rid of the word pension)?

    Yet the only solution that the government seems able to see to address the ever-growing retirement savings chasm is NEST. My idea, I suggest, is very considerably better. I wrote to Steve Webb about it but all I received was a polite letter of acknowledgement from one of his minions. Hopeless.

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