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Billy Burrows: What should we make of the lowest GAD rate ever?

Billy BurrowsI was surprised to notice recently that the Government Actuary’s Department rate for July was 1 per cent. This is the lowest level ever recorded since the GAD was introduced back in 1996.

The GAD rate is based on the yield for 15-year gilts. Before pension freedoms, it was important because it determined the maximum income from capped drawdown. Since then, however, it has become less relevant as there are no income limits for flexi-access drawdown.

That said, this 1 per cent rate has had a knock-on effect on annuity rates because they are based on similar yields.

To put the figure into some perspective, in 2000 the GAD rate was 5 per cent; during 2009, after the credit crunch, it fell to about 4 per cent; and by the end of 2012 it had dropped to 2 per cent. The lowest point for annuities was September 2016 in the aftermath of the European Union referendum but, even then, the GAD rate held firm at 2 per cent.

So, what should we make of the lowest GAD rate ever?

Well, first, it tells us we are still very much in the era of extremely low interest rates and, just when you thought annuity rates couldn’t go any lower, they have.

Granted, they have not plummeted to the lows of 2016, but they are not far off. Indeed, the benchmark annuity (£100,000, ages 65 and 60 with two-thirds partner’s pension and level payments) currently pays £4,344 per annum compared to £3,823 per annum at its lowest-ever point in September 2016.

Billy Burrows: Making your mind up on fixed-term annuities

The low GAD rates also remind us that the safe income withdrawal rate may be lower than many advisers think. There are many interpretations of the safe withdrawal rate but, if the GAD rate is a useful indicator of the sustainable income from drawdown, it may be heading downwards.

Advisers still using the 4 per cent rule as their starting point should review this. While drawdown is an investment proposition, it is always wise to use the income from annuities as a benchmark when working out how much income to take.

It is simply impossible to predict what effect Brexit will have on future interest rates and bond yields but, unless the economic climate changes dramatically, it seems there is no end in sight to low annuity rates.

However, it is worth remembering that there is still a good reason for investing in annuities to provide a level of guaranteed income.
The case for annuities gets stronger with age, meaning older drawdown investors should be encouraged to think about annuitising part of their pension pot for mortality cross-subsidy benefits.

William Burrows is retirement director at Better Retirement

You can follow him on Twitter @BillyBurrows



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There are 2 comments at the moment, we would love to hear your opinion too.

  1. Pensions and Annuities aside, does this not tell us that despite the picture painted by the mainstream media of a doom & gloom brexit and baring in mind how these GILT rates are calculated (by a kind of reverse auction), that confidence in the UK Government is very high, even with a AA rating?

  2. William Burrows 4th July 2019 at 1:17 pm

    Yes – good point

    The flip side to low yields is the rising stock market at the moment

    But beware of the double whammy of low yields and falling equities

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