September's GAD rate is the highest since November 2011. Jenna Towler finds out what it means for retirees.
Pensioners using income drawdown were given a boost when the government announced the maximum amount that can be withdrawn would increase to 3% in September.
The rate – set by the Government Actuary's Department (GAD) on behalf of HM Revenue & Customs – is the maximum drawdown pension that can be taken through income drawdown.
The last time it stood at 3% was November 2011. However, it is still well below the 4% mark reached in May of that year. It has been hovering around 2% to 2.5% for the intervening years.
What the drawdown rate rise means for clients
So should drawdown be considered for all retirees or is it still a niche offering?
LV= head of pensions and investments Ray Chinn said the rate rise was good news for retirees and would give advisers more impetus to discuss drawdown.
He said: "With standard lifetime annuities perceived to offer poor returns for retirees, clients should consider alternatives such as income drawdown and fixed-term annuities.
"These alternative income solutions offer much greater flexibility and greater choice in retirement than a standard lifetime annuity, and the GAD rate increasing to 3% serves to make these options an even more attractive proposition for advisers and their clients."
Figures show that, from this month, the amount a 60-year-old income drawdown client can take from their fund will increase from £51 to £53 per £1,000. This means that a 60-year-old client with a £100,000 fund will be able to take £6,360 rather than £6,120 from their fund.
Chinn added: "It is important that those approaching retirement look at the wide range of solutions available to them and shop around before deciding how to structure their income, as the retirement landscape has evolved considerably over the years. Considering all the options available will help clients to maximise their pension fund."
Back on track
Standard Life head of customer income solutions Alastair Black agreed the increase was positive for retirees and said drawdown rates were returning to expected norms.
He explained "It means that, after far too long, income limits are coming back on track and this gives people more choice and flexibility. A 60-year-old moving into drawdown next month could have a maximum income 15% higher than if they had moved when the yield was 2%, less than a year ago."
However, Black added: "People whose maximum income was last calculated with historically low yields, of 2%, will be stuck on a lower yield for potentially a couple of years unless their provider gives them the flexibility to alter their rate by triggering a review.
"The gilt yield finished at 3.24% in August but unfortunately, due to the rounding system, which rounds down rather than up, this means that people are losing an additional 0.25% this month.
"However we expect to see rates improve further once GAD has completed its review of rates, which the Chancellor called for back in March."
‘Important to have an anchor’
Report to be written by TPR
Lack of innovation for solutions
Some 2,000 consumers affected