Savers in drawdown have been handed a boost after the Government confirmed the rate used to calculate the maximum annual income someone can take in retirement will increase from 3 per cent to 3.25 per cent.
The increase, which will come into effect from January next year, means the GAD rate has risen from 2.25 per cent to 3.25 per cent in the past 12 months.
As a result, LV= says a 65 year old with a £100,000 pension pot will be able to receive an extra £240 a year in retirement income.
LV= head of pensions and investments Ray Chinn says: “For the majority of people, retirement is no longer an absolute event whereby they hit 65 and leave the workplace forever. It’s become a phased event and income drawdown fits very neatly into that space.
“Indeed, one of the reasons clients use income drawdown is because it allows them to turn the ‘income tap’ on and off. For those clients that continue to work this is extremely useful as it means that they can access their fund, but can drip feed the income so they don’t end up in a higher tax bracket.
“In January, a 65 year old income drawdown client with a £100,000 fund will be able to take £7,320, rather than £7,080, from their fund.”
The increase comes after the Treasury rejected industry calls to change the way the GAD rate is calculated due to concerns the current formula does not mirror how insurance companies price annuities.
The Association of British Insurers had argued using a mixture of long-term corporate bond yields and long-term gilt yields to calculate the GAD rate, rather than 15-year gilts, would better reflect the price of a single-life annuity on the open market and increase the maximum income available.