The latest 15 year Gilt Yield figure, which will drive the maximum level of income withdrawal someone can take from their pension from December, has hit a new record low. The yield has fallen 37% since the start of the tax year, financially squeezing those about to take an income from their pension savings, and those approaching their pension income review period.
The 15 year Gilt Yield plays a crucial role in determining the level of income pensioners are able to take, as does the size of a person’s pension fund, and age related income factors provided by the Government Actuaries Department. The fall in yields will not only affect those who choose ‘capped income withdrawal’ as a way of accessing their pension benefits but will also affect those who choose to buy a lifetime annuity.
The decline in the stock market will compound the situation for many pensioners, and will result in them receiving significantly less than they would have done at the start of the tax year, just 7 months earlier.
It is important, in light of the current economic climate, that any decisions people take now relating to their retirement income are taken with the longer term in mind. People who are about to move into income withdrawal for the first time, could consider phasing their funds into income withdrawal or annuity purchase. By only using a part of their overall pension savings to provide their immediate income needs, they retain the flexibility to move more, or all, of the remaining pension into income withdrawal or annuity purchase as and when gilt yields and stock market valuation levels improve.
However, some people want more effective access to their pension savings, than annuity purchase or capped income withdrawal will allow. For those already receiving a guaranteed pension income of £20,000 a year, who have additional pension savings, the option of using ‘flexible drawdown’ is available. This provides access to pension savings without the restrictions of capped income or annuity purchase, enabling people to meet their shorter term income objectives without the need to use other savings.
People can off course use other savings, such as ISAs and collectives to make up any temporary shortfall in income.
Adrian Walker, Skandia’s pension expert, comments:
“Over the last few months we have seen the Gilt Yield continue to fall. This is having a dramatic impact on those approaching retirement, or their 5 year review period, as it has a very real impact on the level of income they will receive.
“Phasing money into income withdrawal and choosing arrangements that have flexible review options, will help meet short term income needs and will help provide opportunities to increase income from future market upturns. This could be combined with the use of other savings to top up any temporary shortfall in income payments. All of these options can provide workable solutions that can cushion any shortfall, and seeking financial advice in reviewing these choices is essential.”