The government announced a full review of Gad rates in the 2013 budget, with an intention to look at “the underlying assumptions used to provide drawdown rates to make sure they continue to reflect the annuity market”. Drawdown providers are hopeful this will prompt a proper investigation into the rates used, which have fallen out of line with annuity rates in recent years.
“Drawdown investors spoke loud and clear about the need for change and it is encouraging that the government appears to be listening,” says Billy Mackay, marketing director at AJ Bell.
“However, there is a danger that the review adopts a ‘lipstick on a pig’ approach and doesn’t deal with the fundamental problem of linking income factors to gilt rates and annuity factors set by the government actuary. The review is an ideal opportunity to break this link and replace it with more simple income limits that give greater certainty to clients.”
Hamid Nawaz-Khan, chief executive of Alltrust, says regularly changing Gad rates is not a robust method. “Comparison with annuity rates is not on a like-for-like basis as life offices use other means to increase their returns on the annuity funds,” he says. “Chopping and changing bases every couple of years helps no one and defeats the objective of keeping costs down.”
Mr Nawaz-Khan makes several suggestions for a more appropriate basis for drawdown income, either independently or as a combination:
• Using a composite yield based on AAA-rated corporate bonds;
• Gad to issue a monthly interest rate based on their assessment of the typical return that may be possible to achieve;
• Increase the minimum return that may be used for calculating drawdown.
There is also the question of gender for drawdown rates. Following the implementation of the gender directive in December 2012, male rates were used as the new unisex rates, meaning a higher rate of income could be drawn by women.
But this is potentially unsustainable; despite the EU ruling on gender equality, women do live longer than men, meaning their pots are more likely to be depleted before death if they are drawing the same amount. The rates are to be reviewed by the government, with Rowanmoor predicting it could lead to a drop in income of up to 5 per cent.
Another issue is that enhanced rates are not available through income drawdown; rates are based on an average, rather than individually underwritten. Some providers, including InvestAcc and Rowanmoor, say better rates should be available for those in ill health.
“Impaired life or enhanced annuities are now commonly used, with a move towards annuities becoming individually underwritten resulting in higher income levels for those with lower life expectancy,” says Robert Graves, head of pensions technical services at Rowanmoor.
