Just like rain: How to cope with falling GAD rates

Andy Zanelli, head of retirement planning at AXA Wealth, suggests some options for your retiring clients as GAD rates hit the floor and finding income becomes more difficult.

This is a summer like no other. The Diamond Jubilee celebrations, the Olympics and, of course, the unseasonal weather!

This season also marks an event which, like the recent incessant rain and cloud, has cast a shadow over retirement planning – the continuing erosion of the Government Actuary Department (GAD) rates which, for August, have hit their floor of 2%.

This trend began in September 2009 (see table on page 3) and signals a real concern for advisers as to the short and medium-term impact upon clients, particularly those who are in drawdown and where the provision of higher levels of income is a priority.

Devastating effects

This has become a big policy problem and the government should be aware of the devastating effect this downward pressure on yields is having on the retirement income of thousands of individuals in the UK. Indeed, many commentators point to government complicity.

The consensus is that gilt prices are in dangerous bubble territory, described by Bill Gross of Pimco as: “resting on a bed of nitroglycerine”.

At some point, prices will fall with the commensurate tick up in yields, but this does not look likely for the remainder of this year – or even perhaps 2013 – so we are in uncharted territory. From a retirement planning perspective the hangover from this kind of ‘economic match-fixing’ will be long-lasting and painful.

Advisers therefore need to consider the alternatives available for clients particularly where income is the main priority, and take a view as to whether any one or a combination of solutions could provide a better outcome.

The introduction of flexible drawdown and flexible annuities can provide some answers for clients and there is the growing emergence of ‘third way’ products that offer guarantees on income levels.

This article continues…