Experts warn maximum GAD drawdowns may exhaust retirement funds

Published:  24 Dec at 6 PM
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Financial experts are concerned that ill-advised pensioners may believe GAD is a target figure for regular drawdowns rather than an income guide.

Independent financial analysis experts are concerned that financial advisors may be encouraging excessive drawdowns. Quoting 120 per cent GAD rather than lower annuity rates is, they say, bad advice at best and disastrous at worst.

The GAD figure is used to determine how much cash a retiree can withdraw annually from his or her pension pot. Over the last few years, many pensioners with fixed incomes were put off by the linked effect on a 100 per cent GAD of high inflation and low interest rates.

In the 2013 budget, the GAD rate was increased in order to allay concerns, allowing pensioners to draw down more than previously on an annual basis. Experts, however, are now saying that financial advisors should be using the GAD rate as a guideline rather than a fixed target figure.

Going further, it has been suggested that FAs who persuade their clients to annually draw down the maximum amount should be forced to report their monitoring of client funds and their reasons for the recommendation. The reason is that, by regularly drawing down the maximum, the fund may well be exhausted before the recipient dies.

The financial regulator is taking some of the blame, as experts don’t consider it is taking necessary steps to warn retirees of the dangers. The rise in GAD to 120 per cent was initially put in place to allow more cash to be taken out at times of emergency or hardship.

Analysts fear that FAs are offering unrealistically high levels of income based on the raised GAD, and ignoring the fact that funds may run out before the client dies. Annual reviews of the fund to ensure the drawdown plan is still on track are a must, they say, rather then the more normal three-yearly check.
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