The latest 15 year Gilt Yield figure, released on 14th October, shows that following the Government’s latest round of quantitative easing, Gilt Yields remain at historically low levels. People entering into income withdrawal today could expect a fall of up to a quarter of their annual income compared to just six months ago.
At retirement, most people either buy an annuity, or make use of income withdrawal arrangements. Income withdrawal arrangements are becoming a growing part of retirement planning for people that don’t want to lock in to an annuity, or who have significant income from other investments and want to use their pension savings as efficiently as possible.
The maximum amount that can be withdrawn each year under the income withdrawal arrangement is calculated based on the size of a person’s pension fund and uses age related income factors provided by the Government Actuaries Department. These factors are linked to the FTSE 15 year Gilt Yield Index. They are intended to broadly reflect annuity rates of a single life, level annuity.
The impact the reduction in the Gilt Yields and the recent decline in world stock markets is having is highlighted in the table below, which shows just how far maximum income limits have fallen in the last six months:
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6 April 2011
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6 October 2011
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6 November 2011 based on FTSE 100 staying as per 6 October 2011
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FTSE 100 level
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6041.13
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5291.26
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5291.26
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Pension fund value
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£100,000
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£87,600
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£87,600
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15 year Gilt Yield
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4.00
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2.75
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3.00
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Maximum income permitted each year (female age 60)
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£5,500
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£4,204.80
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£4,380
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The figures above show that in just six months, assuming that a person's pension portfolio mirrors the movement in the FTSE 100 Index, the maximum amount of income available under an income withdrawal arrangement, will have fallen by 23.5%. That’s nearly a quarter less than six months ago. The November Gilt Yield has increased slightly from the historic low in October, the impact this will have on income depends on the size of the pension fund in November. If all else remains equal, maximum income levels for November could fall by 20.4% since April.
This decline means people moving into income withdrawal will now have less annual income available to them than if they had moved into income withdrawal just a few months earlier. Those already in income withdrawal may find that at the next statutory review period, when their maximum income amount is recalculated, they will have a lower potential ongoing income available to them.
It is important people speak to their financial advisers, as there are alternative solutions available to them as follows:
- If someone is moving to income withdrawal for the first time, then they 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 as and when maximum income levels improve.
- People already in income withdrawal need to check when their next review period begins. If it is soon, then they are likely to see a significant fall in the level of income they can now have.
- When it comes to choosing the right income withdrawal arrangements, people should look for ones that offer the flexibility to move additional funds into existing income withdrawal arrangements should the stock market improve and gilt yields rise to create higher annual income entitlements than may currently apply
- People may need to use the tax free cash or other savings e.g. ISAs to make up the shortfall in income.
- Some people may benefit from moving some funds into an annuity, to provide a level of secure income for the future, especially if they can benefit from enhanced or impaired annuity rates.
Adrian Walker, Skandia’s pension expert, comments: 
“The economic decline, stock market uncertainty, and recent quantitative easing, is having a detrimental impact on pensioners. The decline in Gilt Yields has led to a significant fall in both annuity rates and maximum income withdrawal rates. This is the amount of money pensioners have available to spend, and the decline could be causing real problems for some.
“However, pensioners should not despair. There are things they can do to help reduce the impact on their income, and they should seek advice from a financial adviser regarding the best course of action for them to take.
“The key is for people to be aware of the arrangements they are entering into and the alternative options available to them. Phasing money into income withdrawal and choosing arrangements with flexible review options, will help meet short term income needs and will help provide opportunities to benefit from any future market upturn. This could be combined with the need to use other savings to top up any temporary shortfall in income payments. All of these options can provide workable solutions that can cushion any shortfall.”