Capped Drawdown

For Use By Financial Advisors Only: This note is for general guidance only and is based on our understanding of the current position of the rules relating to capped drawdown. Specific advice should be sought in respect of each individual case to ensure that the requirements of HMRC and relevant legislation are being met.

Capped Drawdown Background

Capped drawdown is an option available to individuals who were in drawdown prior to 6 April 2015. This is a form of drawdown from a pension scheme where a maximum income level (the ‘cap’) is applied. The drawdown pension available to an individual is based on a number of factors. These include the value of the fund, Gilt Yields, and rates determined by the Government Actuary’s Department (GAD).

An individual can draw 150% of the amount specified, which equates very broadly to what could be obtained through a single life level annuity.

Further Designations

If an individual has uncrystallised funds held as part of a capped drawdown arrangement it may be possible for further funds to be ‘designated’ to the capped drawdown arrangement. This is a further crystallisation of benefits, and will release tax free cash as well as resulting in a revised capped income calculation applicable to the crystallised benefits.

Income Reviews

The maximum amount of annual income is calculated at outset, and then once every 3 years (unless you are over the age of 75 in which case they are calculated annually. This new cap will stay in place until the next recalculation, regardless of any changes in value of the value in between.

Exceeding the Income Cap

An individual can exceed the income cap if they wish, which automatically converts the arrangement to a flexi-access drawdown arrangement. The cap will no longer apply, and an individual can draw the balance of the fund as income (which will be subject to tax). The individual will also become subject to the Money Purchase Annual Allowance (MPAA), which is designed to prevent recycling of pension income into a pension scheme. When the MPAA applies, an individual is restricted to a maximum contribution of £10,000 per annum gross to money purchase arrangements, and is no longer able to use Carry Forward.