The fall-out from the government’s new pension rules taking place in April 2015 includes the abolition of the notorious GAD rate that caps how much income retirement savers can take from their pensions.
The GAD rate is set by the Government Actuary Department (GAD) and reflects standard annuity rates and limits how much pension cash is available in income drawdown or a fixed term annuity.
Because the rate is based on gilt yields – the rate paid by UK government bonds – the returns are low as gilts are performing poorly against other investments mainly due to Bank of England fiscal policies to stimulate the economy.
The GAD rate is set monthly. For October, the rate remains at 3% and will probably float around that mark until April.
For a 65 year old with £100,000 invested in a pension or annuity, the income paid is £8,850.
Drawdown safeguard
To put cash into drawdown, a pensioner has to have an independent income of £12,000 a year.
Pension experts warn that abolishing the GAD rate and allowing retirement savers to spend their funds as they wish could have a negative effect on pension in comes in later years.
GAD is designed to stop retirees blowing their pension cash as soon as they give up work by restricting the amount of cash they can withdraw from a pension each year.
From April 2015, that safeguard disappears.
The worry for many financial experts is pension savers will take too much cash in the early years of their retirement, when they are in better health and can spend time on travel or hobbies.
However, the downside of having easier access to pension cash is that many retirees could take too much too soon. That could leave their retirement savings at too low a level to pay a decent income when they are older and need the money to pay for expensive long-term care.
Longevity issues
The problem is balancing the cash available against longevity.
The latest figures from the Office of National Statistics show that more people are living longer.
For example, in 2013, Britain had 13,780 people aged over 100 years old – and 710 of them were believed to be 105 or older.
A significant number of 100 plus year olds were women, who typically have smaller pension pots than men.
Scott Mullen from financial advisers My Pension Expert said: “More people are opting for pension draw down since the Budget and we are urging anyone considering this option to take independent financial advice.”
