Gov’t introduces 2% minimum GAD rate cap for drawdown

HM Revenue & Customs has responded to rising concern over the affect of plummeting gilt yields on retirement savers by introducing a minimum cap of two per cent of the Government Actuary’s Department rate for drawdown calculations.

According to self-invested personal pension provider Hornbuckle Mitchell, the move means that even if the 15-year UK gilt index yield were to fall below two per cent, scheme administrators can continue to use two per cent as the minimum level to be used when calculating drawdown pension payable.

The move follows mounting concern over the affect of tumbling gilt yields, which have been falling as UK government debt has become a safe haven from eurozone problems in recent months, could have on retirement income.

In November 2011, Hornbuckle highlighted the pressure on capped drawdown investors, who are able to take an income of 100 per cent of the GAD rate, down from 120 per cent under the previous unsecured pension regime, as a result of a drop in the rate to a new low of 2.5 per cent following a further slide in gilts.

Stewart Dick, head of sales for Hornbuckle Mitchell, said: “The two per cent minimum level offers some reassurance to worried drawdown clients who might be wondering how low it can go.

“An alternative would be flexible drawdown for those who can meet the requirement for £20,000 annual secured income. This method of taking income is not restricted by GAD rates and could therefore be a viable option for advisers seeking to help clients.”

A spokesperson for HMRC told FTAdviser that GAD rates have not yet fallen below two per cent, but emphasised that when it does, two per cent should be used by scheme administrators.

He said: “As HMRC announced in December, should 15-year gilt GAD rates fall below two per cent, scheme administrators using the GAD tables to calculate the maximum drawdown pension payable should use the gilt yield figure of two per cent.”