The turmoil in the gilt markets has created an opportunity for some retired drawdown investors to take more money from their pension plans.
This is due to the Government Actuary’s Department (GAD) revising its benchmark interest rate, in response to market movements.
The GAD rate now stands at 4.5 per cent for November — the highest level it has been since April 2010. At the start of this year the GAD rate was just 0.75 per cent, and it was 2.25 per cent as recently as September.
This has boosted the maximum annual capped drawdown income available to a 75-year-old with a £100,000 pot from £10,350 at the start of this year, to £13,950 today.
The increase in the GAD rate reflects the similar movement in annuity rates, which have climbed this year, due to higher interest rates. Both have then shot up sharply in the wake of gilt yields increasing significantly at the end of September, following the market chaos of the mini budget.
AJ Bell points out that many of those who went into drawdown before April 2015 — when the pension freedom rules were introduced — would have opted for ‘capped drawdown’. This limits the amount retirees can withdraw each year, with the maximum based on prevailing GAD rates.
This maximum rate is reviewed on a three-year basis, but AJ Bell points out that members can request to have an additional review if the scheme administrator agrees, or certain events trigger an additional review.
This higher GAD rate could give them an opportunity to take a higher income, if this is appropriate for their circumstances.
AJ Bell adds that many of these drawdown investors would have since moved into flexi-access drawdown, offering in the wake of the pension freedom rules. This gives members the opportunity to take what the want from their pension plans.
However AJ Bell says some will have remained in capped drawdown, particularly as this means retirees retain the standard annual allowance, rather than the significantly lower money purchase annual allowance (MPAA) which applies to those that have taken pension income flexibly.
AJ Bell head of policy development, Rachel Vahey, says:“GAD rates are something of a relic of the pre-2015 pension income market, but they are important for those clients that began taking income before this date and who remain in capped drawdown.
“Some retirees opted to remain in capped drawdown to retain the full annual allowance, which would be lost were they to switch to flexi-access drawdown.
“The increase in GAD rates means they may now be able to take more money from their pension, but still retain their annual allowance. This is an opportunity for advisers to reach out to those clients to help them request an additional review of their income drawdown levels to start from the next pension year.”
Prior to April 2015 retirees entering drawdown would either have done so under ‘flexible’ or ‘capped’ drawdown.
Flexible drawdown was only available to those with guaranteed income of at least £12,000 per year. Capped drawdown sets a limit on the income level at which individuals can drawdown their pension, linked to GAD rates.
The GAD rate, which is based on current UK gilt yields, is used to determine the amount of ‘basic pension’ that can be drawn for each £1,000 of the individual’s pension. GAD rates are released on the 15th of each month, with the most recent update seeing GAD rise from 3.25 per cent in October to 4.5 per cent for November. The current 4.5 per cent GAD rate permits £93 for every £1,000 of pension assets for a 75 year old.
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