Capped drawdown

Capped drawdown used to be a way of taking an income from your pension pot where the money in your pot was invested and you would receive an income from the pension pot. There was an income limit, or ‘cap’, on the amount you could take out each year. It’s no longer available but if you’re already in capped drawdown, you can continue to use it.

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’:

• your capped drawdown will convert to a flexi-access drawdown, and
• the tax relief you can get on future pension savings is reduced.

But you can move additional pensions into an existing capped drawdown if your provider allows this. 

With capped drawdown, your pension pot – after you’ve 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 rate set by the Government Actuary's Department. The capped drawdown rate is broadly based on the income a healthy person of the same age could get from a lifetime annuity.

It’s reviewed every three years if you’re under age 75, and annually after this.

On the review date, a new maximum income is calculated – based on the revised pension pot value and the most recent GAD rates – and set for the next period.

If you move additional pension pots into an existing capped drawdown, the income will be reviewed and a new maximum calculated. 

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 £60,000. This is called the ‘annual allowance’.

But if you withdraw more income than is allowed by the drawdown ‘cap’, you’re considered going forward to be in ‘flexi-access drawdown’. So the amount of tax relief on pension savings to defined contribution pensions that you can get is reduced to the level of the Money Purchase Annual Allowance (MPAA).

In the 2022-23 tax year the MPAA is £10,000.

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

Do you or a dependant want to keep your full annual allowance? Then be aware that – even if you don’t exceed the cap under your existing capped drawdown – 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 is unless you’re withdrawing a small pot of £10,000 or less in full and in one go.

You can opt to convert from capped drawdown to flexi-access drawdown by notifying 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 flexi-access drawdown.

The Money Purchase Annual Allowance won’t apply to a dependant who converts their dependants’ capped drawdown to a dependant’s pension drawdown.

The allowance would only be triggered if they accessed another pension pot valued at £10,000 or more flexibly.

You can nominate who you’d like to get any money left in your capped drawdown when you die.

• If you die before you’re 75, any money left in your capped drawdown passes tax-free to your nominated beneficiary. The money must be paid within two years of the provider becoming aware of your death, or moved into another arrangement for payment as income or lump sums in the future. If the two-year limit is missed, any money that is paid out after this time, will be added to your beneficiary’s other income and taxed as earnings.
• If you die after 75: if your nominated beneficiary takes the money as income or a lump sum, it will be added to their income and taxed as earnings.