Gilt yields
24/01/2012
Pension investors have been given some protection against further cuts in their income after the government put into place measures to stem the damage from falling gilt yields. The yield on 15-year gilts is important to investors who have their retirement fund locked in ‘capped drawdown' as it is one of the factors used to determine how much money can be taken from the fund each year. The higher the yield, the more income can be taken; but since April of last year, yields have fallen from 4.5% to 2.5%, largely in response to the eurozone crisis. It has been estimated that each gilt yield fall of one percentage point is the equivalent of an 11% loss of income for a 65-year-old male. However, the Financial Times reported that with gilt yields falling to levels not envisaged by HM Revenue & Customs, it has been confirmed that any falls below 2% will be disregarded.
What will happen to gilt yields going forward? Haluk Soykan of Wellington Investment Management, manager of the St. James's Place Gilts funds, recently gave his opinion. "Gilt prices were supported in December by the purchasing program of the Bank of England as well as continued investor risk aversion resulting from the sovereign crisis in Europe. This resulted in yields being kept low. The EU summit in December failed to reassure the market that policymakers are committed to a cohesive fiscal stance; therefore, investors continued to seek safety within the gilt market. Our outlook for the UK economy remains fairly unchanged into the start of 2012. We believe the economy is still in recession and given that real disposable income has fallen at its fastest pace since the 1970s, we anticipate seeing further contraction in consumer spending throughout the year. We also expect to see further quantitative easing from the Bank of England. Given the UK's plan to reduce its fiscal deficit, it is currently avoiding scrutiny from ratings agencies; but with the Autumn Statement indicating a weak growth story and with the deficit set to grow, this combination means the UK is not immune from a rating downgrade at some point. This could well result in yields rising once again." As we have frequently stated, investors should seek to build a diversified portfolio and, despite some perceiving them to be a risk-free asset, this is also true of gilts, even after last year's record performance.
