Increases in the Government Actuary’s Department (GAD) rate could create an opportunity for advised clients to review their capped drawdown income levels, AJ Bell has suggested.

The firm explained that before the introduction of pension freedoms in April 2015, those going into drawdown would likely have entered capped drawdown, which limits the maximum income according to the prevailing GAD rate.

However, these rates are linked to gilt yields, meaning that the recent market volatility saw a substantial increase in GAD interest rates, which now stand at 4.5 per cent, the highest level since April 2010, despite starting the year at just 0.75 per cent.

As a result of this, the maximum annual capped drawdown income available to a 75-year-old with a £100,000 pot, for instance, has increased from £10,350 at the start of 2022 to £13,950.

AJ Bell explained that while the limit to the income a capped drawdown investor can take is reviewed at least every three years, a member can request to have an additional review if the scheme administrator agrees, or certain events trigger an additional review.

The firm also pointed out that although capped drawdown is now closed to those entering drawdown for the first time, and many clients will already have switched to flexi-access drawdown, some remain in capped drawdown.

These members, according to AJ Bell, also usually retain the standard annual allowance, rather than the significantly lower money purchase annual allowance (MPAA) that applies to those that have taken pension income flexibly.

AJ Bell head of policy development, Rachel Vahey, stated: “GAD rates are something of a relic of the pre-2015 pension income market, but they are important for those clients that began taking income before this date and who remain in capped drawdown.

“Some retirees opted to remain in capped drawdown to retain the full annual allowance, which would be lost were they to switch to flexi-access drawdown.

“The increase in GAD rates means they may now be able to take more money from their pension, but still retain their annual allowance.

"This is an opportunity for advisers to reach out to those clients to help them request an additional review of their income drawdown levels to start from the next pension year.”

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