Pensioners who have opted for income drawdown, allowing them to defer converting their pension pot into an annuity or income for life, have been hit by a drop in the Government Actuary's Department (GAD) rate, says Rockingham Retirement.

The rate has dropped to 3.25 per cent as a result of plummeting government bond yields, which Rockingham has attributed to the quantitative easing measures introduced earlier this month to help stabilise the economy.

Under income drawdown rules, the annual amount that an individual may take from a pension fund is calculated in accordance with gilt yields. However, now these yields have tumbled, the GAD has reduced its band rates down to a 'buffer zone' of two per cent, in case yields continue to drop.

Drawdown pensioners hit by falling GAD rate"The dramatic plunge in government bond yields has flattened the GAD rate, which is in turn having a direct effect on wealthier retired people with bigger pension pots," said Steve Hunt, managing director at Rockingham Retirement.

For example, a pensioner with a pot of £500,000 18 months ago at a rate of five per cent would benefit from £43,200 a year from the drawdown option. However, had they not taken those benefits, now the fund would be reduced to £350,000. With the GAD rate at 3.25 per cent, the maximum income would now be £26,460.

"Clearly there is a problem for everyone in or about to go into retirement. They are being hit by a double whammy of the plunge in share values which has wiped out huge chunks of pension funds. And now with the Bank of England buying up to £150bn of gilts as part of its 'quantitative easing' stimulus package designed to encourage banks to start lending again, the price of gilts has been forced up and, consequently, returns down.

"As gilts are used to determine income amounts from income drawdown, now called unsecured pension, you can see where the problem lies," he added.

Hunt is urging anyone who will be taking income drawdown not to delay, as GAD rates are likely to fall further. "It looks as if the situation will get worse before it begins to improve."

- Pensions Age March 2009

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