fall in gilt yields leads to more sustainable maximum income limit for drawdown investors
Gilt yields at 15-year lows mean a more sustainable maximum income limit for income drawdown investors, according to the Drawdown Bureau.
With 15-year gilt yields falling to 4.11% on 13 June, the maximum annual income limit is now £18,000 with a minimum limit of £6,300. This compares to a maximum withdrawal of £25,700 and minimum of £9,012, the levels at the inception of income drawdown back in 1995 when long-term gilt yields stood at 8%.
Head of marketing at the Drawdown Bureau David Marlow said new drawdown investors and those who reach a triennial review should now find the maximum income limit more sustainable than it has been in the past.
'At the outset of income drawdown, the maximum income limits were very high relative to what we regard as sustainable in today's market,' he said.
'The amended limits still allow investors considerable scope to use income drawdown for tax planning purposes, manipulating the amount of income to lower income and capital gains taxes for example, but the lower maximum should protect investors from drawing down too much.'
Minimum and maximum annual withdrawal levels under income drawdown are based on the Government Actuary's Department (GAD) tables on long-dated gilt yields. The minimum possible withdrawal is 35% of the maximum level.
Gilt yields have fallen in recent months as the industry has expected government borrowing to increase on the back of its well publicised spending plans, but demand for gilts has outstripped supply with private and corporate investors seeking safe havens for their money. When demand is high, the price of the asset rises and the yield subsequently drops.
Falling gilt yields have also led to speculation that annuity rates are also set to drop, as annuities tend to be backed by UK gilts and corporate bonds and follow the movements of long-dated 15-year stock.
However, managing director of the Annuity Bureau Peter Quinton points to recent moves from leading annuity providers as evidence of the unpredictability of exactly what rates may or may not do in the future.
When the gilt rate dropped to 4.18% on 12 June, Prudential actually moved its annuity rates up while Britannic Retirement Solutions simultaneously revised its rates down. In response to the further fall in the gilt yield to 4.11% on 13 June, Legal & General and GE Life also cut their rates.
Quinton added: 'All of this should act a reminder to those contemplating delaying annuity purchase in the hope of an enhanced return from higher rates in the future that the best laid plans do not always materialise.
'Delaying annuity purchase is a risk, as calculations show it is likely to take retirees many years to make up any lost income during the period in which they delay.'
In Quinton's view, annuity rates are likely to stay more or less the same this year, despite the fluctuating gilt yield, with little optimistic change in the short term.
He also believes that looking at today's market, entry into the European single currency would have little effect on the returns from gilts or corporate bonds and should therefore have negligible impact on annuity rates.
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