7th October 2013

Scottish Life: 3.25% GAD rate makes income drawdown even more attractive

The increase in GAD rate, together with the return to a 120% maximum, means that the annual income a new drawdown client would be able to withdraw has gone up by a third, compared with a plan which commenced a year ago.

For example:

This is good news for those who have not yet crystallised their funds and are looking to start taking income, but the big question is how can clients with existing drawdown plans take advantage of this?

The answer is they can't. That is unless:

1. The plan's current pension year ends in October, when they will qualify for 120% of GAD, and
2. Their drawdown provider will allow an ad hoc GAD review, i.e. one which takes place in between the start and end of the 3 year reference period.

We are one of those providers, yet another reason to choose us for income drawdown.

What do you need to do?

We send out an annual renewal pack 6 weeks prior to the end of the pension year. This gives you a chance to meet with your client and discuss the plan's progress to date and their options for the next year.

A key part of this process is reviewing the performance of the investment portfolio relative to the client's financial objectives, and comparing the current balance with the client's updated risk profile. It is also possible to request an ad hoc GAD review. This would involve a recalculation of the income limits using the client's current age, fund value and applicable GAD rate.

In the example above the client would now be age 66 and the applicable GAD rate would be 63 per thousand, resulting in a maximum income level of £7,560, up by 37.4%.

Four months in a row

This month's increase in GAD rate is the fourth in a row, perhaps reflecting the end of the current recession.

In addition, in November and December 2012 the GAD interest rate was 2.00% which is the lowest possible value.

Both of these facts mean that an ad hoc review is likely to be good advice for many drawdown clients whose annual review will take place before the end of the year. And don't forget female clients will see an additional benefit from the current use of male rates for both sexes.

Is this advisable?

It is good practice to increase the client's income limit, in order to give them the maximum range of options.

However it is not good practice to assume that because a level of income is allowed that it is the most appropriate level for the client.

In particular if the client is looking to take ongoing income for the foreseeable future, the sustainability of this level of income should be assessed.

Our Income Planning Tool can help with this.

The tool uses stochastic modelling to assess the probability of a given level of income being sustained over set periods of time, assuming an investment in one of our Governed Retirement Income Portfolios.

More information

Read through the answers to some common questions about our income planning tool given at a recent event. These include why we think a percentage probability is the best way to measure sustainability.

View our full suite of drawdown tools and support materials and find out how we can help support your drawdown process.

Notes

¹ Assumes PCLS has already been taken.

Published September 2013
2TW1584

For professional advisers only

Retirement, Pensions