The GAD rate is the way of calculating how much income to take from a capped drawdown pension pot when the money was invested in income generating funds.
Capped Drawdown was scrapped when pension freedom rules came into force from April 6, 2015.
Although Capped Drawdown is closed to retirement savers, anyone working under the GAD rate will continue to do so.
What Does The GAD Rate Stand For?
GAD stands for the Government Actuary Department. The GAD rate cap the money you can take from a pension.
How The GAD Rate Works
Once a retirement saver has taken their 25% tax-free lump sum, the rest of the pension is invested in funds that produce an income.
The income from the pension is not guaranteed and can vary, depending on how the underlying funds perform, like a defined contribution pension.
The GAD rate allows retirement savers to take 150% of the income a healthy saver of the same age could get from investing their fund in a lifetime annuity.
How much you can take depends on your age and is worked out from GAD rate tables drafted by actuaries using financial and longevity data.
The rates are reviewed every three years for retirement savers aged under 75 years old, and every year for those aged over 75.
After the review, a new set of tables is published that lasts until the next review.
The GAD rate is based on the value of UK medium to long term gilt yields or return on lending the government money by buying bonds.
GAD rate examples
This gives a basic pension, which is the amount of money someone can draw for each £1,000 in their pension fund at a given age.
The way the rating works, the older you are, the more you can take.
This also related to the gilt yield, which also gives more as the rate rises.
For example, if the GAD rate for a 70-year-old is £53 for every £1,000 saved for a gilt return of 0.75%. From a £100,000 fund, which gives a basic pension of £5,300 a year (53 x 100).
The basic pension is then increased by 150% to give the largest yearly capped drawdown income from the fund, which is £7,950.
The GAD rate for a young retirement saver is less.
At 55 years old, the rate is £32 for every £1,000 saved in the pension with a gilt value of 0.75%, which gives an income of £3,200 a year uprated by 150% to £4,800 on a £100,000 fund.
The GAD Rate And Pension Saving
The GAD rate adds a twist to pension saving.
If you are in capped drawdown and continuing to save into a pension while taking an income, you can pay in up to the maximum annual allowance of £40,000 each year.
However, if you draw more than the GAD rate says you can have as an income, you flip into the flexible access pension rules and your annual contribution allowance reduces to the Money Purchase Annual Allowance (MPAA) of £4,000.
Once the GAD rate is broken, you cannot return to capped drawdown, so lose £36,000 of tax relieved contributions each year.
Capped Drawdown When You Die
It’s entirely possible that some of your retirement savings will be left unspent when you die.
If you die before reaching 75 years old any money remaining passes tax-free to your nominated loved one. They pay no tax on the windfall if they take the cash within two years of your death.
The gift is taxed if they miss the deadline.
The remaining funds are taxed if you die after reaching 75.
Looking Up The GAD Rate
You can find the current GAD rates published online, together with instructions on how to use them.
The current tables are the 2011 Drawdown Pension Tables for July 2017 onwards. A revised version is due in July 2020 but could be delayed due to the coronavirus pandemic.
To use the table, go to the PDF version of the current table
Scroll down to page 8 – the 2011 Drawdown Pension Tables.
The table takes age from 23 to 85 years old on the left axis and the gilt yield on the top axis.
If the gilt yield is 0% and the saver in capped drawdown is aged 65 years old with a £75,000 fund, the basic pension is:
£41 for every £1,000 in the fund = £41 x 75 = £3,075
X 150% = £4,612.50
GAD Rates FAQ
GAD is one of those confusing tax and pension acronyms that make little or no sense to those not in the know.
This guide attempts to unscramble the jargon and to make some sense of the GAD rate.
To help, here are some questions to the most asked questions about the GAD rate.
No. the GAD rate only affects pensions that were in capped drawdown before April 6, 2015.
After then, flexible access rules for pensions started for anyone aged 55 years old or over and capped drawdowns were stopped.
The GAD rate is part of a formula for working out how much pension income a retirement could draw.
GAD stands for Government Actuary Department, who are the boffins that work out the tables for use in the capped drawdown calculation.
The GAD rate comes from the relationship between someone’s age, level of savings and returns from government bonds (gilts)
No. The fund levels rise and fall in line with the performance of the underlying investments and are not guaranteed.
Yes, she can inherit your unspent pension savings, but if she pays tax or not depends on your age when you die.
If you are under 75, she gets the money tax free, providing she takes the full amount within two years of your death.
If you are over 75, income tax is due on the full amount.