Capped Drawdown | Money Saving Advisors
Learn about the old Capped Drawdown rules (pre-2015) and how they limited annual pension withdrawals.
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A flexible way to withdraw – within limits
Capped drawdown lets you take income from your pension pot while keeping the rest invested. It was available before April 2015 and still applies if you had it in place before then. It's a balance between flexibility and control, ideal if you want to manage income while protecting long-term growth.
How does capped drawdown work ?
Before pension freedoms came in 2015, capped drawdown was one of the few ways you could access your pension without buying an annuity. You can no longer start a new capped drawdown plan, but existing ones still run - and they come with a few key rules.
Here's how it works in practice:
- You take income, but within limits
The government sets a maximum you can withdraw each year - usually based on annuity rates set by the Government Actuary's Department (GAD). This limit is reviewed every three years if you're under 75, and annually after that. - Your pot stays invested
The money you don't take remains invested, giving it a chance to grow. But markets can go up or down, so you'll need to keep an eye on how things are performing.
Why keep an existing capped drawdown arrangement
Even though flexible drawdown (or flexi-access drawdown) replaced capped drawdown for new plans, many people keep their old capped plans. Here's why:
- It protects your annual pension allowance
If you move to flexible drawdown and take income, your annual allowance drops to £10,000. With capped drawdown, as long as you stay within the limit, you keep the full £60,000 allowance. That's a big deal if you're still paying into a pension. - You can still switch later
You're not locked in forever. If your needs change, you can move from capped to flexible drawdown at any time – but not the other way around.
Summing up
Capped drawdown isn't available for new retirees, but if you already have it, it's still a valuable tool. You can take an income, stay invested, and protect your pension contributions - all with some helpful limits to keep your pension fund lasting longer.
Frequently Asked Questions
Is capped drawdown still available in the UK?
Capped drawdown is no longer available for new applicants. It was replaced by flexible drawdown in April 2015 when pension rules changed. But if you already had a capped drawdown plan in place before that date, you can carry on using it under the original rules - taking income within HMRC-set limits and keeping your pot invested.
What happens if I exceed the capped drawdown limit?
If you take more than the allowed maximum income, your plan will automatically convert to flexible drawdown. This has a knock-on effect: the money purchase annual allowance (MPAA) is triggered, reducing your contribution limit from £60,000 to £10,000 annually, so you could lose valuable tax relief on any amount over that threshold. You could also be subject to income tax on the extra you withdraw.
Can I switch from capped drawdown to flexi-access drawdown?
Yes, switching is allowed at any time if you decide capped drawdown no longer suits you. But once you switch to flexible drawdown, there's no going back. People often switch to access more income or simplify their finances, but it's important to weigh the loss of your higher pension contribution allowance before deciding.
How often are my capped drawdown limits reviewed?
Before age 75, your maximum income limit is reviewed every three years to make sure it still reflects current annuity rates and the size of your pension pot. After that age, the review is annual. These reviews can increase, decrease, or leave your withdrawal cap the same - it depend on how your investments have performed and market rates.
Can I keep paying into my capped drawdown funds?
Yes, and that's one of the main advantages. As long as you stick to the income drawdown cap, you can still contribute up to £60,000 a year across all your pension schemes and get tax relief. This makes capped drawdown a smart option for people who want to take some income payments while continuing to build their pension savings.
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