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.”