Updated: April 16, 2024
Capped Pension Drawdown
Do you have a capped drawdown pension? Find out how to make the most of it by reading this guide.
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Capped pension drawdown may no longer be available to new retirees, but if you’re already in such a plan, you can continue to use it.
This guide will tell you everything you need to know about capped drawdown pensions to help you decide if it’s still the right option for you.
What is a capped drawdown pension?
Capped drawdown is a way to take an income from your pension while the rest of the fund remains invested. The amount you can withdraw (or “drawdown”) is capped each year, with the figure based on Government Actuary Department (GAD) tables.
The limit is designed to help ensure that your pension pot lasts as long as possible, though as with all forms of pension drawdown there’s no guarantee. This is because the rest of your pot is still invested; as such, the value can rise and fall based on stock market fluctuations, so it’s always worth speaking with an advisor who can help you determine how much you should be accessing each year.
Rules and regulations
Capped drawdown pension rules set out the amount you’re able to withdraw each year, with maximum income limits and restrictions a key part of this kind of plan. But there are other regulations you should be aware of too, so here we answer some of the key questions you may have.
How much can you drawdown?
Once you’ve taken out the initial 25% tax-free lump sum, the remaining fund can be withdrawn subject to maximum income amounts each year. This is equivalent to 150% of the GAD rate (also known as the basis amount), which is based on 15-year gilt yields and your age.
The GAD rate is a unique figure and will tell you how much you can withdraw per £1,000 in your fund. Current legislation requires your income limit in a Capped Drawdown arrangement to be reviewed every 3 years if you are under age 75, and every year if you are aged 75 or over.
Capped drawdown limits can also be reviewed at other times too, such as if funds are removed to purchase an annuity, or you specifically request it.
It can be a complex formula, but you can find out more about GAD rates in our guide, or can get an idea of how much your limit could be by using a capped income drawdown calculator.
It’s worth seeking expert advice as well so you know exactly how much you can withdraw without exceeding the limit.
What if the limit is exceeded?
If you exceed the limit imposed by the Capped Drawdown arrangement in any one year, you’ll be automatically converted to a Flexi-Access Drawdown arrangement instead.
This means you won’t be subject to any annual withdrawal limits, but you will be subject to Money Purchase Annual Allowance (MPAA).
This is important to consider if you’re still contributing to your pension, as the maximum gross contributions you’ll be allowed to make into any of your pension schemes will drop from £40,000 to £4,000 per tax year.
What happens to my pension when I reach 75?
There are a few things that may happen once you reach the age of 75, including:
- Any contributions you make – if you’re still making them – won’t qualify for tax relief and they also won’t be tested against your annual allowance. However, not all capped drawdown pension providers will accept contributions past this age.
- Final benefit crystallisation events (BCEs) will take place at this age if you have any uncrystallised funds, along with final tests against the lifetime allowance.
- 75 is also the age at which death benefits become taxable at the beneficiaries marginal income tax rate (see below).
There’s a lot to think about if you’re approaching age 75, and it’s vital to make sure you know what you could come up against.
Speaking to an independent advisor should therefore be a key part of pension planning for anyone at this age.
What are the rules on death?
This depends on when you die. If it’s before the age of 75 and your pension fund is still invested, it will pass to your beneficiaries tax-free (as long as benefits are paid out within 2 years of death).
If you’re aged 75 or over, it becomes taxable. Your beneficiaries are still able to take your capped drawdown death benefits, either as an income or a lump sum, but they’ll pay income tax at their marginal rate.
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Which pension providers offer capped drawdown?
No providers offer this option to new retirees anymore, but if you’re already in an existing scheme with your current pension provider, they should still be operating under the same rules.
How to access capped pension drawdown
The ability to take capped drawdown ended on 6 April 2015 when greater pension freedoms came into being. Up until that time, anyone that had reached minimum pension age could take out this kind of pension, but this option has since been closed to new applicants.
However, if you’re already in this kind of pension, you’re free to continue using it. You may also be able to move any additional pensions you have into your capped drawdown scheme, if your provider agrees. Though it can be difficult to know how best to make the most of this kind of plan, which is where a specialist advisor can come in.
The pension advisors we work with are well-versed in the area of capped drawdown, and they’ll know exactly what you should do to take advantage. They’ll start with a free pensions review to see where you currently stand and from there can help you work out how much you should be withdrawing each year – while abiding by the cap – to ensure your pot lasts as long as possible.
Find out more about how an advisor can help you make the most of accessing capped drawdown – make an enquiry or call 0808 189 0463 to get started.
Capped vs. flexi-access drawdown
When the pension freedoms were introduced in April 2015, capped drawdown was scrapped in favour of offering retirees more flexibility, with flexi-access drawdown the go-to alternative. This means those who are already in capped drawdown may be wondering if they should switch to flexi-access instead. So, let’s take a look at your options.
Both kinds of pension offer a way to take an income from your pot while leaving the remainder of your fund invested. The main difference between capped and flexi-access drawdown is that, with the latter, there’s no limit on the amount you can withdraw each year.
This can offer far more flexibility and so fits in well with the aim of the pension freedoms, but the downside is that there’s a greater risk of you spending your pot too soon, as without an annual limit you may be tempted to withdraw more than you perhaps should. Remember, flexi-access also reduces your annual allowance to £4,000, though this may not be a concern if you’re no longer contributing to your pension.
Ultimately, the choice is yours, and you may be able to switch. You can change from capped to flexible drawdown by requesting to transfer your pension fund or by breaching the 150% GAD limit. It is important to note that you won’t be able to return to a capped arrangement at a later date. Always seek advice beforehand so you can be confident it’s the right decision.
Advantages and disadvantages
The main advantage of capped drawdown is that, thanks to the annual limit, you’re less likely to run out of money in retirement. Of course, there’s no guarantee that your pot will last, but there’s at least a mechanism in place to discourage spending too much too quickly.
But this is also one of the key disadvantages of a capped drawdown pension: the lack of flexibility. There could be a year when you’d like to withdraw more, for example, but would be unable to without breaching the limit and moving to flexi-access. This will understandably reduce the appeal for some, and the benefits of capped drawdown may not be enough to encourage them to stay.
Get matched with a pension drawdown specialist
Ready to consider your options? If you want to make sure you’re getting the most out of your capped drawdown pension or are considering transferring to a more flexible scheme, you’ll need to speak to a pension drawdown specialist. That’s where we come in.
We can put you in touch with your ideal advisor – we’ll simply ask for a few details and will scour our network to find the expert to suit. Call us on 0808 189 0463 or make an enquiry and you’ll soon be benefiting from a free, no-obligation pension review to discuss your options further.
Ask a quick question
We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions Ask us a question and we'll get the best expert to help.
Tony Stevens
Finance Expert
About the author
Tony has worked in a vastly diverse array of areas in the pensions industry for over 20 years. Tony regularly writes for trade press, usually on topical and pensions pieces as well as acting as a judge at prestigious national events.
Tony is also a highly qualified Independent Financial Adviser in his own right. His mantra has always been “Hope for the best, but plan for the worst”, and believes that the biggest impact that an adviser can have on a client’s life journey is to take them on a journey from generally having little or no real idea of what their retirement will look like, to giving them the understanding of what their retirement looks like now, then helping them navigate a path to what they want their retirement to be.
