Pension spending power cut by up to a third

By Retirement
Pension spending power cut by up to a third

The spending power of many pensioners has been cut by up to a third by the combined effect of government economic policies, claims new research.

In August 2012, a typical pensioner needs a fund of £140,000 just to match the income from a pot of £100,000 three years ago, according to over 50s financial advice firm Saga.

More than 325,000 pensioners with capped income drawdown pensions are suffering financial difficulties from reduced gilt yields and changes made to pension rules by the government.

Saga director general Dr Ros Altmann said: “The Bank of England recently suggested that rising asset prices have offset falls in annuity values so that pension incomes are unaffected. This is certainly not the case. For those in income drawdown, the impact has left many retirees facing a catastrophic fall in pension.

Poor health penalised

“Those in poorer health have been particularly penalised, as no special provision is made within the new rules for their shorter life expectancy.

“These people seem to have no escape from quantitative easing.  They have done the right thing by saving for their retirement, but are being forbidden from spending their own money.  Those who are less healthy and less wealthy are being particularly penalised.”

She claims the wealthiest pensioners are least affected as they can take out as much money as they like.

Income drawdown is popular with retirement savers who do not want to be locked into an annuity offering no capital growth. Industry experts estimate there is around £20billion invested in these funds.

The government caps income pensioners can take out of their fund each year, with the maximum set by the Government Actuary Department (GAD), based on the income that would be paid by a standard annuity.

Falling gilt yields

This is, therefore, linked to changes in 15-year gilt yields, which have declined sharply following quantitative easing. GAD rate has fallen from 4% in August 2009, to 2% in August 2012, causing a dramatic decline in annual income for drawdown investors.

Treasury rule changes have further reduced drawdown incomes. From April 2011, the maximum amount that can be withdrawn each year was cut from 120% of the GAD rate to 100%.

Falling gilt yields, reduced GAD rates and the lower drawdown cap has left many middle class pensioners facing cuts of more than a third in their drawdown income or more if the funds they invested in performed poorly.

Since August 2009, maximum income that can be taken has fallen by around a third.

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