Customers who invested in income drawdown have seen their incomes fall by as much as 40% according to research from Which? magazine. They claim that a 65 year old male retiring with a £200,000 pension pot would receive close to £7,000 less than they would have in 2007, before the financial crisis. The fall in income from drawdown plans can be attributed to lower gilt yields as well as a reduction in the maximum withdrawal limit which was brought down from 120% to 100% back in April of last year. The dramatic fall in income has left many drawdown customers looking at alternative options including fixed term and investment linked annuities.
To get an insight into why drawdown income has fallen so heavily it is worth remembering that back in the summer 2007 15-year gilt yields stood at 5.12%, whereas today they are just 2.27%. Annuity rates have fallen from 7.36% to 5.85% over the same time frame. Gilt yields have been pushed downwards as investors look for a safe haven amidst the ensuing turmoil in the Eurozone, making British government bonds increasingly attractive. This along with the affect of quantitative easing has sent retirement incomes plummeting at a time when inflation has remained high. What’s more if gilt yields continue to fall at the same rate as they have recently, by 2017 a 65 year old male with a £200,000 pot would only be able to get an income of £6,820.
A recent survey found that 90% of advisers said their drawdown clients were concerned about their income level diminishing in the future. It is unwise for drawdown customers to withdraw the maximum amount each year from their plan but with increased pressure on household finances it makes it hard to resist withdrawing the maximum amount. The same survey, conducted by retirement specialist MGM Advantage, also found that nearly two thirds of advisers have recommended exiting drawdown and opting instead to choose investment linked annuities. The data also found that over a third of advisers have advised customers to draw upon any other savings as a means of propping up their income. Less than 20% of advisers said their drawdown customers were happy to endure a lower income whilst waiting for the financial markets to recover. Andrew Tully from MGM advantage described the situation facing retirees as a “perfect retirement storm which shows no signs of abating”.