Capped drawdown

Money Advice Service

Capped drawdown was a way of taking an income from your pension pot where the money in your pot was invested in funds that would pay you an income. It is no longer available.

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 have a capped drawdown

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 (2019-20 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 2019-20 the MPAA is £4,000.

You can’t change your mind and go back into capped drawdown once you exceed the cap

To find out more about the Annual Allowance and Money Purchase Annual Allowance see our guide Tax relief on pension contributions.

Find out more about Flexi-access drawdown.

Things to think about

If you or a dependant want to keep your full Annual Allowance remember that, even if you don’t exceed the cap under your existing capped drawdown arrangement, you can do it in other ways.

That means that if you access another part of your pension pot flexibly, either using pension drawdown or by taking some or all of it as cash or by taking income from a ‘flexible annuity’, you’ll still trigger the lower Money Purchase Annual Allowance 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 pension 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 pension drawdown.

It would only trigger if they accessed another pension pot valued at £10,000 or more flexibly.

What happens to your capped drawdown 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, provided the money is paid within two years of the provider becoming aware of your death. If the two year limit is missed, the money will be added to your beneficiary’s other income and taxed as normal.
  • If you die after 75: if your nominated beneficiary takes the money as income or a lump sum after 6 April 2016, it will be added to their income and taxed in the normal way.

Your other retirement income options

For an overview of all of your options and more on where to get help and advice see our guide Options for using your pension pot

This article is provided by the Money Advice Service.

Some important information about Rest Less Money

We want you to understand the positives, but also the limitations of using our site. We operate in a journalistic manner and therefore all information, guidance or suggestions provided are intended to be general in nature, and you should not rely on any of the information on the site in connection with the making of any financial decision.

When we set out to build Rest Less Money, we wanted to be a trusted place where you could find helpful information about financial matters affecting the over 50s. As a free to use resource, we try hard to provide the best information we can, but we cannot guarantee that we won’t occasionally make mistakes. So please note that you use the information on our site at your own risk, and we can’t accept liability if things go wrong.

Key things to remember when using Rest Less Money:

We do not offer financial advice – As a journalistic site, it’s important to know that we do not provide financial advice. You should always do your own research before choosing any financial product so that you can be certain it is right for you and your specific circumstances. If you are in any doubt, please seek professional financial advice from a regulated financial advisor.

No Liability – please note that you use the information on Rest Less Money at your own risk and we can’t accept liability for how you choose to use the information given on our site. We will often provide links to content or products and services available on other third-party websites. These are provided purely for your convenience and we cannot be held responsible for any content, or any of the products and services offered on any website that we link to.

 

Accuracy of Information – We try to make sure that all the information provided on Rest Less Money is correct at the time of publishing as we want it to be the most helpful resource possible. Sadly, we are not perfect however, and so we can make no guarantees as to the completeness, accuracy, adequacy or suitability of the information available on the site.
Whilst we work hard to try and provide accurate information, deals and prices can change, so whilst they may be correct at the time of writing, providers may subsequently decide to alter them later – so always double check first.

A final note on the Rest Less Community Forums – always remember that anyone can post their opinion on the Rest Less Community Forums, so it can be very different from our own opinion and may not be factual or well researched. Always be wary of any content posted on the forums and be sure to do your own research and due diligence on anything suggested. 

We hope you find Rest Less Money a useful resource and we would welcome your feedback at [email protected] on how to make it even better. For more information on any of the above you can read our full terms and conditions.

Share on facebook
Share on twitter
Share on linkedin
Share on whatsapp
Share on email

Get the latest advice, news and inspiration

No spam. Just interesting and useful stuff, straight to your inbox. For free.

By providing us your email address you agree to receive emails and communications from us and acknowledge that your personal data will be used in accordance with our Privacy Policy. You can unsubscribe at any time by following the link in our emails.

Join the Rest Less Money Club

Sign up today to get early access. Coming soon.