GAD Is An Income Guide, Not A Target, Argue Experts

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Retirement savers are spending their cash too quickly if they stick to over generous GAD drawdown rates, according to financial experts.

Government Actuary Department (GAD)-based drawdown rules are not to change, Chancellor George Osborne announced in his autumn statement.

But independent financial analysts Defaqto reckon advisers inflate retirement income figures by quoting 120% GAD when they should use lower annuity rates.

The GAD figure determines the amount of cash a retirement saver can withdraw from a pension each year.

In recent years, many pensioners and financial groups have complained low interest rates and high inflation linked to a 100% GAD rate put many pensioners living off a fixed income in a difficult financial position.

Monitor lifetime funds

As a result the GAD rate was increased in the last Budget.

The result was pensioners could take more money from a pension in drawdown.

Defaqto’s Richard Hulbert believes pensions and advisers should look at the 120% GAD rate as a drawdown guideline rather than a target and financial advisers suggesting clients continually draw the maximum should have to report how they monitor client funds in their retirement and the reasons behind their strategy.

The firm argues taking regular 120% drawdowns will exhaust retirement savings before the client dies and pension and financial regulators are not taking enough steps to warn pensioners about the issue.

Hulbert said: “Regulators have failed to tell advisers that the 120% is just a ‘holiday’ to enable high level of income to be taken at times of hardship, not a consistent ongoing amount for the taking. 120% will not last a life time. Many advisers ignore that and the clients just want to take the higher level of income.

Annual checks

“The real need is for regulators to explain should draw more than 100% of GAD or a level above an annuity rate then advisers need to explain why and how they are making the decision and what happens when the cash runs out.”

Defaqto fears advisers are offering clients high level of income based on 120% GAD rather than considering how much they should be taking so their funds are not exhausted before they die.

The firm also suggests annual reviews rather than checks every three years to make sure drawdown plans are on track.

“In my experience, pensioners who miss their drawdown reviews are the ones who suffer the most financial problems in their later years,” said Hulbert. “A more regular review would help them avoid these problems.”

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