Pensioners who have chosen to use Income Drawdown to turn their pension pot into an income, could be hit by a fall in the GAD rate and consequently see their incomes cut.
Falling gilt yields mean that the GAD rate will be cut in March from 3.25% to 3%.
For a pension pot of £100,000 this will reduce the maximum income available from £7,320 in February to £7,080 on March.
People coming up to retirement and entering Income Drawdown for the first time, as well as those already in Income Drawdown and have their mandatory review in March, will be affected.
Income Drawdown plans need to be reviewed every three years before the age of 75 and annually after this age. At the review the maximum income will be recalculated based on the prevailing GAD rate at that time.
Existing Income Drawdown investors, who do not have a mandatory review due in March, will not be affected by the change.
Change in Income Drawdown rules?
There have been growing calls amongst retirement experts for the rules to be changed, so GAD rates are decoupled from gilt yields.
Commenting on the issue, Ray Chinn, Head of Pensions and Investments at LV=, said: He says: “The recent FCA review of annuities highlights just how important it is for people to shop around and consider all the retirement income alternatives available, to get the most out of their pension fund. As people are spending longer in retirement, income drawdown product could provide many with the flexibility they require.”
Chinn continued: “However LV= would like to see the calculation for the income drawdown limit revised so that it is not linked to gilt yields. We believe this would help better protect clients’ income from volatility in the market.” (Source: Money Management)