Income Drawdown: GAD rate rises slightly


Income Drawdown investors received a small sliver of good news last week after it was announced that the maximum income available has risen slightly.

The maximum income allowable from Income Drawdown plans is set by the Government Actuary’s Department and is known as the GAD rate. It is calculated by using the retiree’s age, gender and crucially the yield on 15 year gilts.

The GAD rate has fallen as low as 2.25%; however it was announced last week that from 1st March 2012 this figure will rise by 0.25% to 2.5%, meaning a slight improvement in the maximum income available.

The change means that a man, aged 65, with a pension fund of £100,000 will be able to take a maximum income of £5,600 per year. A woman of the same age would have a maximum annual income of slightly less at £5,300.

Income Drawdown mandatory reviews

Over the past few months the dramatic fall in gilt yields has had a knock on effect on Income Drawdown plans, significantly reducing the amount of income available.

Maximum income from Income Drawdown

Source: The Retirement Partnership

For new retirees this has meant a smaller level of income has been available, often less than an Annuity. But perhaps the group hardest hit have been existing Income Drawdown investors approaching a mandatory review.

Since April last year the maximum allowable income has been subject to a mandatory review, every three years for retirees aged below 75 and annually over this age. At each mandatory review the maximum level of income is recalculated, based on the GAD rate at the time, meaning that retirees who have undergone mandatory reviews recently have seen their income drop significantly, many by as much as 40%. This has caused considerable financial hardship to many and calls from industry experts to remove the link between the maximum income available and gilt yields.

Flexible Drawdown alternative

Retirement experts point out that for some retirees facing a lower income due to the changes on GAD rates Flexible Drawdown may offer an alternative solution.

Flexible Drawdown is available to anyone aged over 55 who satisfy the Minimum Income Requirement, of having a gross income of at least £20,000 a year from guaranteed sources, namely Annuities, Final Salary or Defined Benefit pensions and the State Pension. The amount of income available under Flexible Drawdown is uncapped and not subject to the GAD rates, allowing those people who qualify to take additional income as it is required.