Capped Drawdown Pension
We regularly receive enquiries from people who have a capped drawdown pension and would like to know in what way the recent changes to how pensions can be taken in retirement affect them.
It’s important to have a clear understanding as to how the capped income drawdown rules could influence your pension. The good news is that the advisors we work with are experts when it comes to drawdown pensions.
In order to clarify these points, for anyone who has this type of plan, we have produced this guide to capped income drawdown which covers the following areas:
- What is a capped drawdown pension?
- How do pension drawdown tables work?
- What is a capped drawdown pension calculator and how does it work?
- Is a SSAS pension drawdown also available on a capped basis?
- Speak to a pensions expert about capped pension drawdown
What is a capped drawdown pension?
Capped drawdown pension is a method of taking income from your pension fund and was freely available, before 6 April 2015, to anyone over the age of 55 who contributed to a defined contribution pension scheme (also known as money purchase). New capped pension drawdowns have been unavailable since April 2015.
As with all other drawdown methods, capped drawdown pensions are invested in funds which can rise and fall depending upon the performance of the underlying assets. Your income is not guaranteed for life and is subject to income tax at your marginal rate.
As the name suggests, capped drawdown limits the amount of income that can be withdrawn from the pension during the year and this limit is reviewed on a regular basis. This cap is designed to ensure your pension fund lasts as long as possible.
What is the maximum income you can take from a capped drawdown pension?
Capped drawdown pension rules state that once the 25% tax-free sum is taken at outset the remaining fund is subject to maximum income amounts during ‘pension years’.
The maximum capped drawdown pension income allowed during a pension year is equivalent to 150% of the Government Actuary’s Department (GAD) annuity rate. This rate is used to calculate the income a person of the equivalent age would receive from a lifetime annuity and is also known as the basis amount.
Capped income drawdown limits are worked out using specific drawdown pension tables issued by GAD for this purpose. For practical examples of how these amounts are calculated please see the ‘how do pension drawdown tables work’ section below.
How is a pension year defined?
For the benefit of capped drawdown plans a pension year is defined as any 12 month period from the point an initial income withdrawal is made. So, for example, if one income withdrawal was made on 1st November 2018 that pension year will expire on 31st October 2019.
What happens if the capped drawdown maximum income limits are exceeded?
Exceeding the maximum limits on your capped drawdown plan affects the annual amount you can contribute to your personal pension plan and still receive tax relief. The current annual allowance stands at £40,000, however, after you withdraw more than the cap your plan is then considered to be a flexi-access drawdown.
Once this happens the amount of annual savings you are allowed to contribute to a personal pension and still get tax relief reduces quite dramatically from £40,000 to £4,000 – the level of the money purchase annual allowance (MPAA). The annual allowance cannot be reset.
For the majority of people who reach retirement this may not be such an issue as they may not wish to continue contributing to their pension once they are taking drawdown.
If you’d like to know more about this area make an enquiry and we can arrange for a pensions advisor we work with to contact you directly.
Can I switch between capped drawdown pension providers?
Yes, its possible. You can transfer your fund to a new pension provider as long as they will accept a capped drawdown transfer and this transfer is on a like for like basis. The maximum income limit and review timescales will also carry over to your new provider.
You can also transfer to a provider offering a flexi-access drawdown arrangement if you would prefer. However, as outlined above, this will trigger a change to your annual allowance from £40,000 to £4,000.
If you’re considering transferring pension providers and not sure about the process make an enquiry and we can arrange for a specialist to get in touch.
How do pension drawdown tables work?
Income drawdown tables are used to calculate the income cap for capped drawdown plans using the Government Actuary’s Department (GAD) rates first to work out the basis income you can receive which is then uplifted by 150% to show the maximum.
The equation uses your pension fund, age and relevant GAD rate. For example, Janine is 58 years old and wants to drawdown £150,000 into her existing capped drawdown plan. The applicable GAD rate shows the basis amount is worth £49 per £1,000 of drawdown pension.
The basis amount works out at – £150,000/£1,000 x £49 = £7,350 per annum.
The maximum income limit for Janine’s plan is – £7,350 X 150/100 = £11,025 per annum.
This illustration is purely for example purposes only. For an accurate calculation, make an enquiry and we can arrange for an expert to work out an example using your own pension fund.
How often are the capped income drawdown limits reviewed?
The capped drawdown income limits are reviewed every three years if you’re under 75 years of age. The new maximum income will apply at the start of the first pension year following this review cycle. If you’re over 75 the income limit is reviewed and recalculated every year starting from the first pension year where you reach 75.
So, if in 2019 you reach 75 the drawdown pension tables used will differ every year from this point on and, therefore, the income limit will change.
Capped income drawdown limits can also be reviewed when:
- Ad-hoc requests received by the pension member
- Pension funds are crystallised and added to an existing capped drawdown arrangement
- Funds are removed due to special circumstances (due to a divorce, for example)
- A portion of funds are removed to purchase an annuity
What is a capped drawdown pension calculator and how does it work?
A capped drawdown pension calculator is a tool that can be used by either a pension provider or pensions advisor in order to work out what the maximum income you can receive based on your fund, age and applicable GAD rate (as outlined above).
The good news is such instruments are widely available on many financial websites – including this one.
Is a SSAS pension drawdown also available on a capped basis?
A small self-administered pension scheme (SSAS) is a form of personal pension, therefore, capped drawdown arrangements would have been freely available prior to 6 April 2015.
However, as outlined above your SSAS pension drawdown would have needed to commence before this date for this option to remain in place.
Speak to a pensions expert about capped pension drawdown
If you have questions and want to speak to an expert for the right advice, call Online Money Advisor today on 0808 189 0463 or make an enquiry.
Then sit back and let us do all the hard work in finding the pensions advisor with the right expertise for your circumstances. – We don’t charge a fee and there’s absolutely no obligation.