HMRC should increase Gad rate floor to 3-4%, Rowanmoor
HM Revenue and Customs must introduce a higher floor rate of 3 or 4 per cent for Government Actuarial Department rates used to calculate retirement income to counter the corrosive effects of low gilt yields, according to self-invested pension provider Rowanmoor pensions.
David Downie, director of actuarial services at Rowanmoor Pensions, said that individuals who took an unsecured pension in August 2007 will be severely affected by the drop in gilt yields, which are currently sitting at a historically low 2 per cent, more than 3 per cent lower than the 5.25 per cent seen five years ago.
Mr Downie warned that pensioners who took an unsecured pension in August 2007 will be severely affected and will see a considerable drop in income at their five-year review date in August this year.
The fall in gilt rates comes on top of changes implemented in April 2011, when the government reduced drawdown income from 120 per cent of the Gad rate under unsecured pensions to 100 per cent under capped drawdown.
Individuals can opt for flexible drawdown that removes limits on income, provided they can prove a minimum income of £20,000 per year.
Falling gilt yields severely reduce the amount that can be drawn from a fund under capped drawdown, with a 70-year-old male expecting to face a reduction of up to 9 per cent in income per 1 per cent reduction in gilt yields, according to Rowanmoor.
The position could potentially get worse still for male pensioners in Sipp schemes from December when the gender neutrality rules come into play, which will see mortality rates for all pensions schemes with no sponsoring employer adjusted.
Although nothing is yet final, the consensus view is that rates are expected to improve for females but worsen for males.
In December 2011 HMRC put in place a floor that meant actuaries could ignore any falls below 2 per cent as use this as an effective rate for calculating maximum pension income.
Mr Downie said the current 2 per cent Gad rate could be raised to 3 or 4 per cent “pretty easily”, giving nearly 20 per cent improvement in levels of income.
Mr Downie said: “At the end of the day, HMRC was able to put the 2 per cent gilt yield floor in place without the need to resort to lengthy legislation, so theoretically it could be changed again.
“As things stand now, the combination of changes in government regulations, continuing poor pension fund returns and rock-bottom gilt yields will result in significant reductions in incomes for many pensioners.”