Since the Budget there’s been an increase in the number of people entering drawdown contracts and we recommend that anyone looking to do so seek independent advice.
Doncaster, South Yorkshire (PRWEB UK) 19 July 2014
The maximum income that can be taken from income drawdown and fixed term annuity contracts – the GAD rate – will remain at 3% next month. It’s the fifth consecutive month that it’s remained unchanged, the last time such stability in the rate occurred was eleven and a half years ago. It’s the fourth GAD rate announcement since the Budget, when it was revealed that from April next year there will no longer be any restrictions on how individuals over 55 can access their pension pots, making the GAD rate obsolete in the process.
Income drawdown allows people to keep their pension pot invested but withdraw an income from it each year. However, the amount of income that can be taken is set by the Government’s Actuary’s Department (GAD) and is known as the GAD rate. The GAD rate is set against standard annuity rates which in turn are influenced mainly by gilt yields (UK government bonds), with low gilt yields equalling low annuity rates.
In the interim until next April, retirees invested in drawdown have seen their annual income cap raised as they are now able to withdraw 150% GAD instead of the previous 120% GAD. As well as increasing the annual income cap, the Budget has also made changes to the minimum income requirement (MIR) needed to apply for flexible drawdown. Reducing it from £20,000 of secured income to £12,000, meaning that is has become a viable option for even more people.
While both of these new measures will award greater flexibility to anyone considering drawdown, the introduction of the 150% GAD rate limit should be treated with a degree of caution. As while there is an obvious appeal to taking a higher income in the years immediately after retirement – when health is likely better – doing so risks eroding a fund’s future growth potential and could even eat into the capital.
Scott Mullen director at My Pension Expert said:
“Just like we predicted when the Budget was announced it looks highly likely that the rate will be maintained at 3%, right the way through to its terminus in April next year. Since the Budget there’s been an increase in the number of people entering drawdown contracts and we recommend that anyone looking to do so seek independent advice. That way a discussion can be held as to whether drawdown is the right option and if it is how much can be afforded to be withdrawn from a pension pot, either as a lump sum or as income. As while the increased level of flexibility now afforded to retirees is great news, caution is still needed to avoid fund longevity issues long term.”
Monitor GAD rates and their impact on the investments at retirement at My Pension Expert for regular news and updates.
My Pension Expert is a company of Diploma Qualified Financial Advisors specialising in options at retirement.