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Falling GAD rates could mean drawdown rejected

Investors could turn their backs on drawdown as falling GAD rates cut the maximum pension income available, according to experts.

The Government Actuary’s Department has confirmed that GAD rates will fall from 4 per cent to 3.75 per cent in June.

This follows the Government’s decision to reduce the annual income available from 120 per cent to 100 per cent of the GAD basis figure.

Prudential head of business development Vince Smith-Hughes says: “While drawdown and the flexibility it provides suits many, the change in the GAD rate this month and the recent reduction to 100 per cent of GAD maximum withdrawal means that higher levels of income have been scaled back significantly. Other solutions such as asset-backed annuities will continue to increase in popularity as some retirees clamour to enjoy a higher sustainable income.”

Lowes Financial Planning technical analyst Barry O’Sullivan says the drop in GAD rates will push investors to use scheme pension as a “credible alternative”. He says: “Capped and flexible drawdown are not going to be the only alternatives to annuities.

“We think scheme pension is a credible alternative, particularly for drawdown clients who are about to experience a dramatic fall in income at their last five-year income review.”



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

  1. Julian Stevens 31st May 2011 at 12:44 pm

    I still think that the level of income that may be drawn from accumulated pension funds needs altogether to be decoupled from annuity rates, not least because ‘the annuity trap’, as it’s become known, is possibly the single biggest deterrent to saving for retirement by way of a pension plan.

    This is why I have suggested that what we need instead is a Pension Income Bond, under which the level of income is geared to consume the fund in its entirety over the remaining expected lifespan or the retiree, allowing for a reasonable rate of investment growth (say 5% p.a.), with an insured element to maintain the same level of income in the event of early fund burn-out or of the retiree living longer than expected.

    I am aware that guarantees cost money and that Solvency II is going to make them even costlier but, if the underwriting is competent, the likelihood of a guarantee of this type being called in is probably fairly slim, not to mention being anything up to 25 years in the future.

    If such a product is viable, then surely MetLife is the company to deliver it and getting rid of the annuity trap would represent a very significant step forward for the retirement savings market.

  2. Drawdown as an income option may prove less attractive when compared to Fixed annuities nevermind asset backed with the recent changes allied to the GAD rate decline.

    For those for whom drawing the income is important the usage of scheme pension and investment linked annuities may now prove more attractive. Those with significant pension incomes may be attracted to Flexible Drawdown when it comes in plus other methods to access funds.

    That said, many of those who find Capped Drawdown/formerly USP/formerly PFW attractive simply wish to draw their lump sum with no income requirement.

    Alternatives such as ‘Dripfeed’ drawdown for those with large enough funds and who do not require their PCLS may continue to be attractive also.

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