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.

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