APPROACHING
Capped drawdown
The old income drawdown regime – which consisted of capped and flexible
drawdown – was replaced with flexi-access drawdown in April 2015.
While no longer available to new investors, capped
drawdown may still offer some interesting benefits.
The key reason to maintain a capped drawdown
policy is for the ability to release income from your
pension fund from age 55, yet retain the maximum
£40,000 annual pensions allowance.
Under the new rules, those who choose to take
income from their fund using flexi-access drawdown
or an uncrystallised funds pension lump sum (or
UFPLS for short) are limited to a maximum annual
allowance of £10,000.
Capped drawdown has its restrictions, too.
Withdrawals are limited –capped – to a figure of no
more than 50 per cent above a level annuity based on
numbers produced by the Government Actuary’s
Department (GAD). If the income taken exceeds this
limit, the policy immediately converts to flexi-access
rules and limits.
The upper income limit is reassessed every three
years for those under age 75 – annually for those
over 75 – and both are based on the individual’s age
and fund size.
It is only available to those who already have an
arrangement in place, so you must be over the age of
55, but there is no upper age limit and you do not
have to take any money out at all.
That may seem odd, but the new freedoms have
transformed pensions in to a rather efficient estate
planning tool.
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Death benefits are the same as those used for flexiaccess. If you die before you reach 75, all of it can be
taken either as cash or drawdown – tax free – and
may be passed on to a beneficiary.
After the age of 75 it gets a little more complicated,
but the terms are generous. If paid as a lump sum
before April 2016, it will be taxed at 45 per cent. From
the 2016/2017 tax year, it will be liable to the highest
marginal rate of the beneficiary.
If passed on as a drawdown arrangement, the income
is treated like normal income and falls under the
income tax rules.
Despite the flexibility it offers, few will wish – or have
the money – to invest more than £10,000 a year into
their pension and so capped drawdown policies will
gradually disappear as investors switch into flexiaccess or purchase annuities.
Key points
Capped drawdown lets you release income
from your pension from the age of 55, yet
retain the maximum £40,000 annual
pensions allownace
It is only available to those who already have
an arrangement in place
Withdrawals are limited to 50 per cent above a
level annuity set by the government. If the
income taken exceeds this, the policy converts
to flexi-access rules and limits