Defaqto: 120% GAD rate not fit for permanent use

Defaqto has warned that advisers relying on the 120% capped drawdown limit could be jeopardising their clients’ safe retirement.

The chancellor confirmed in last week's Autumn Statement that there won't be any changes to Government Actuary Department (GAD)-based drawdown rules,

Defaqto insight analyst Richard Hulbert said the 120% cap on income drawdown should be used as only a "holiday" and advisers who opt for a level above an annuity rate should be asked to explain how they would monitor their clients' retirement funds.

He warned that drawing out at 120% consistently will not last investors a ‘lifetime' and the regulator should have done more to clarify that point for advisers, when the chancellor brought the rule back in last year's Autumn Statement.

The Chancellor confirmed last week that it would not change the way income drawdown is coupled with annuity rates.

Hulbert said: "What [the regulator] hasn't really put across to the advisers is that the 120% is just a ‘holiday' to enable high level of income to be taken at times but it shouldn't be the consistent ongoing level that's taken. - 120% won't last you a life time. Many advisers ignore that and the clients just want to take the higher level of income.

"The real need is for the regulation to say if you are going [for] more than a 100% of GAD or you are going for a level which is above an annuity rate then, you'll need to explain why and how that is going to be monitored to make sure that that happens."

Hulbert said that advisers were too willing to go for the level of income that their client would like, rather than properly weighing up the risks of what that could mean for their client's decreasing retirement pot.

There is not enough information out there about the risk of the "compounding effect of negativity" he warned, which meant that the effect of a downturn in the markets could be a lot harsher for a retirement pot that is already shrinking because money is being drawn out, than in the accumulation phase.

Hulbert also said there needed to be annual reviews of clients' retirement plans in drawdown not triennial ones as the regulator dictates.

"Those people that miss their reviews, in my experience, are really those people that end up with the painful experience. They have their triennial GAD review and they find that their income is going down and it's forced upon them. At least an adviser can mitigate that."

Hulbert's comments come after consultancy Moody's Analytics last week voiced concerns over the lack of effective risk mapping tools for advisers planning the decumulation phase, saying the issue threatened to create problems and could "permanently destroy wealth".

Categories: Regulation|Income

Topics: Retirement|financial advisers |GAD|Income Drawdown