Gad rate increase to prompt shopping around

The Gad rate for October 2013 has been set at 3.25 per cent, up from September’s 3 per cent.

The continuing upward trend means that, from October, a 65-year-old client taking income drawdown with a fund of £100,000 would be able to take £7,320 per annum instead of £7,080 from their pot.

The Treasury has also said that it will be reviewing the income drawdown table in the autumn. Since the gender directive came into force, Gad rates for drawdown have been set at the male rates, which were historically the higher of both genders. A review could therefore prompt a drop as the rate accounts for longer-living females.

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Gad rates hit an all-time low in August 2012 when they fell to 2 per cent and have been below 3 per cent since November 2011. The rate has now risen for four consecutive months.

Ray Chinn, head of pensions and investment at LV=, said the trend is good news for financial advisers and for clients. “I’m not saying people should go out and take the maximum Gad, but it gives them flexibility compared to annuities where you’re stuck with what you had five years ago, potentially forever,” he said.

In March this year, the government reversed a cap on those using drawdown products for their pensions income to 100 per cent of the Gad rate to 120 per cent, boosting many pensioners’ retirement income.

The Gad rate rise gives scope for people to consider income drawdown if they had not before, Mr Chinn said, adding that it may be a prompt for clients to shop around and consider the whole market instead of looking solely at fixed-term annuities.

Advisers have “gone a little bit cold over the past 24 months” on income drawdown as rates dropped, Mr Chinn said.

“It’s a product that advisers should be seriously looking at with their clients. Advisers can really justify their fees in terms of increased income.”