Synopsis: A gap between drawdown rates and annuities is emerging.
Date posted: Tuesday, February 18, 2014
It always pays to watch the gap between corporate bond yields and gilt yields, because, all other things being equal, the wider the gap, the closer together are annuity rates (driven primarily by corporate bond yields) and drawdown limits (pegged to 15 year gilt yields).
The last time we compared drawdown limits (in August 2012), the maximum draw was 100% of the GAD/HMRC rate and there was about a 1.25% yield gap between long term AA-rated corporate bonds and the corresponding long-dated gilts. As a result annuities offered initial income of between 108% (male 74) and 121% (female 55) of the drawdown ceiling.
Today, annuity rates are gender neutral; the drawdown limit is 120% of the GAD/HMRC rate and the same corporate bond/gilts gap has shrunk to 0.8%.
As a consequence, annuity rates are now generally 10%-15% lower than the maximum withdrawal rates, as the table below shows.
£100,000 Income Options
Based on the 3.0% drawdown interest rate for March 2014 and Money Advice Service top rates for a non-smoker nil guarantee annuity (£100,000 purchase price, Reading postcode).
The better initial income on offer from drawdown may be one of the reasons why the FCA has extended its research beyond the annuity market in its newly promised market study into retirement income (see our earlier Bulletin).
These numbers make drawdown look an attractive option for the income-hungry at retirement investor. However, once the new FCA central investment return of 5% becomes mandatory in April, the investment risk aspect of drawdown will be made painfully clear in illustrations.
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