Capped drawdown is closed to new applicants
Capped drawdown is a type of income drawdown product that was available before 6 April 2015.
If you already use capped drawdown it will continue under its existing rules, but if you exceed the drawdown ‘cap’ the tax relief you can get on future pension savings is reduced.
How it works
With capped drawdown your pension pot (after you have taken your tax-free amount) is invested into funds designed to pay you an income.
This income is taxable and can rise or fall depending on the fund’s performance. It’s not guaranteed for life.
The amount you can take as income is capped at 150% of the income a healthy person of the same age could get from a lifetime annuity.
The maximum income you can take out is worked out using GAD (Government Actuary Department) rates.
It is reviewed every three years if you’re under age 75 and yearly after this.
On the review date a new maximum income is calculated – based on the revised fund size and prevailing GAD rates – and set for the next period.
Tax relief on pension saving – new rules for capped drawdown from April 2015
Provided your income withdrawals stay within the drawdown ‘cap’, the amount of defined contribution pension savings on which you can get tax relief each year using capped drawdown is £40,000 (2017-18 tax year) – called the ‘Annual Allowance’.
However, if you withdraw more income than is allowed by the drawdown ‘cap’ then you’re considered going forward to be in ‘Flexi-access drawdown’ and the amount of tax relief on pension savings that you can get is reduced to the level of the Money Purchase Annual Allowance or MPAA.
In 2016-17 the MPAA was £10,000 and was expected to reduce to £4,000 from April 2017, however this proposal was suspended pending the outcome of the general election.
In July 2017 the Government announced its intention to go ahead with the proposals it previously withdrew, including the reduction in the MPAA to £4,000. It also confirmed the reduction would apply from the original date of 6 April 2017.
This change needs to be implemented through a new Finance Bill, expected late summer, early autumn 2017. However, in the meantime we would suggest that you do not exceed the £4,000 limit if you are affected by the MPAA.
Find the updated position on MPAA here.
You can’t change your mind and go back into capped drawdown once you exceed the cap:
Things to think about
Bear in the mind the following, if you (or a dependant) want to keep your full Annual Allowance:
Even if you don’t exceed the cap under your existing capped drawdown arrangement, if you access another part of your pension pot flexibly (either using Flexi-access drawdown or by taking some or all of it as cash or by taking income from a ‘flexible annuity’) you’ll trigger the lower Money Purchase Annual Allownance for all future defined contribution pension savings.
This applies to any pot valued at £10,000 or more.
You can opt to convert your capped drawdown arrangement to Flexi-access drawdown by notification to your scheme (rather than by exceeding the cap).
In this case the Money Purchase Annual Allowance is only triggered when your first income payment is taken from the flexi-access drawdown arrangement.
The Money Purchase Annual Allowance won’t apply to a dependant who converts their dependants’ capped drawdown arrangement to a dependant’s Flexi-access drawdown.
It would only trigger if they accessed another pension pot valued at £10,000 or more flexibly.
What happens when you die?
You can nominate who you’d like to get any money left in your drawdown fund when you die.
If you die before 75: any money left in your drawdown fund passes tax free to your nominated beneficiary whether they take it as a lump sum or as income. These payments must begin to be made within two years, or the beneficiary will have to pay income tax on them.
If you die after 75: and your nominated beneficiary takes the money as income, they will pay tax on it in the normal way. Any lump sum taken on or after 6 April 2016 will be added to their income and taxed in the normal way.
Your other retirement income options
Income drawdown is just one of several options you have for using your pension pot to provide a retirement income.
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