The gilt yields used for calculating pension income drawdown reached their highest level for five years this month at 5.25%.
Gilt yields have risen 1% since June, according to Skandia, the savings product provider, and are projected to stay at 5.25% next month. Gilt yields reached 4.5% last July, 4.25% in July 2005 and 5% in July 2004.
Skandia says advisers can increase their clients’ income by around 5% a year by taking out an income drawdown contract while high gilt yields are available.
Colin Jelley, head of tax and financial planning at Skandia, says: “Just as every Bank of England base rate change creates winners and losers, changes in gilt yields also have numerous impacts. For a 65 year old male about to start drawdown, the increase in gilt yields equates to an increase in maximum income of about 5.5%. This is an opportunity for financial advisers to demonstrate value by helping clients to make best use of the changes.”
The high gilt yield increases the maximum income withdrawals for contracts taken out before 31 August. Clients with income drawdown contracts in the pipeline could take out a higher maximum income for the next five years if they complete a contract by the end of August.
The rise in gilt yields will also increase the maximum initial income that clients can take from a total pension fund.
A statement from Skandia says: “Any increase in maximum income defers or reduces the need for further pension fund assets to be taken out to make up target income. Not having to use the additional pension fund assets increases the tax efficiency of any death benefits, because the remaining fund can be passed to beneficiaries under the scheme’s trust arrangement without suffering tax.
“Deferral also potentially increases future tax-free cash because the remaining pension fund assets can continue to benefit from investment growth.”
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