Capped drawdown FAQs

Here's some questions that have been regularly asked since the pension flexibility changes were introduced on 6 April 2015. These FAQ are for financial advisers only. They mustn’t be distributed to, or relied on by, customers. They are based on our understanding of current legislation, which may change.

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Yes, provided the additional designation is made to their existing capped drawdown arrangement rather than creating a new drawdown arrangement under the scheme.

When topping up a capped drawdown arrangement, the additional designation will cause the maximum income available, calculated at 150% of the GAD rate, to be reset for the remainder of the review period. The new maximum will apply immediately if it is higher. If it is not higher, it will start from the beginning of the next pension year. The recalculation does not change the duration of the review period, and the arrangement will continue under the capped drawdown rules.

The main advantage of remaining under the capped drawdown rules is that taking income within the GAD limit from a capped drawdown arrangement does not count as having flexibly accessed pension rights. This means that the client would not be subject to the money purchase annual allowance (‘MPAA’) provisions (unless they had flexibly accessed pension rights under a different arrangement). 

It depends. If the conversion of a capped drawdown arrangement to flexi-access drawdown happens as a result of the client requesting it, the money purchase annual allowance (MPAA) provisions will not be triggered unless income is taken from the flexi-access drawdown arrangement (unless the client has  flexibly accessed their pension benefits under a different arrangement).

If, however, the capped drawdown arrangement is converted to flexi-access drawdown because an income payment above the GAD maximum was paid from the capped drawdown arrangement, then the MPAA provisions will be triggered (unless they already applied to your client).

The client can ask for their capped drawdown arrangement to be converted to the flexi-access drawdown rules and if the scheme agrees to the request (it is not obliged to do this), higher income will then be available immediately. If the client in capped drawdown wants higher income but the scheme does not agree to convert to flexi-access drawdown the client may wish to consider transferring their pension savings to another scheme that does offer it.

Yes, it is possible to arrange a capped drawdown transfer and remain under the capped drawdown rules in the receiving scheme, if this is offered by the receiving scheme. This is the only circumstance under which a new capped drawdown arrangement can be created on or after 6 April 2015.

The main advantage of remaining under the capped drawdown rules is that taking income within the GAD limit from a capped drawdown arrangement does not count as having flexibly accessed pension rights. This means that the client would not be subject to the money purchase annual allowance (MPAA) provisions (unless they had flexibly accessed pension rights under a different arrangement).

It is worth checking, however, that the receiving scheme is able and willing to accept the capped drawdown transfer and keep the arrangement as such. Some schemes may ask the client to agree to convert to the flexi-access drawdown rules under the receiving scheme as part of the pension transfer process.