What is a capped drawdown pension?

A capped drawdown pension is a type of income drawdown pension that was available to savers before 6 April 2015. While it is no longer open to new investors, those who already have capped drawdown can use it to withdraw a tax-free lump sum up to 25% of their pension’s value, receive taxable payments within the allowable limit and keep the rest of their savings invested.

How capped drawdown works

Capped drawdown is similar to flexi-access drawdown which allows you to access your pension savings flexibly. As long as you are aged 55 (57 from 2028) and over you can take up to 25% of your total personal or workplace pension tax-free. You can then keep the remaining 75% of your pension invested, and withdraw money on an ad-hoc basis. However, unlike flexi-access drawdown, if you have a capped drawdown pension, the amount you can withdraw is capped at a certain amount.

  • Capped drawdown GAD limits: capped drawdown withdrawals cannot exceed the maximum Government Actuary Department (GAD) limit by more than 150% in any given pension year. A pension year is the 12-month period that directly follows your first pension withdrawal. GAD rates for capped drawdown are broadly calculated based on what the average pensioner of the same age could get from a lifetime annuity. GAD rates are reviewed every three years if you’re aged 75 and under and annually if you’re over 75. Additional reviews can happen at your request or be triggered when you add more money to your capped drawdown pension, purchase an annuity with some of the funds or share your pension in a divorce settlement.
  • Tax relief on capped drawdown pensions: as long as you stay below your maximum withdrawal limit or ‘cap’ you can continue contributing to your pension as you did before you began accessing your savings. The annual contribution limit for 2024/25 is £60,000 which includes money paid in by you, your employer and tax relief from the government. If you exceed the maximum GAD limit and withdraw more from your pension than your cap allows, you’ll automatically convert your capped drawdown pension to a flexi-access drawdown pension. If this happens the money purchase annual allowance (MPAA) will be activated, limiting your tax-free contributions to £10,000.
  • Converting to a flexible drawdown pension: it’s relatively straightforward to convert a capped drawdown pension to a flexi-access drawdown pension. In addition to exceeding the maximum GAD limit, you can also notify your pension provider that you’d like to convert your pension or simply transfer your capped pension to a new pension provider who may automatically convert your capped pension.
  • Capped drawdown death benefits: similarly to other drawdown products, if you die before the age of 75, whatever’s left in your pension can be paid to a beneficiary tax-free in the form of a lump sum, flexi-access drawdown or an annuity. If you die after the age of 75, your beneficiaries will be charged income tax at their marginal rate.

How pension drawdown works

Drawdown is simple with PensionBee. Our service combines all of your old pensions into one easy to manage online plan. Funds are managed by some of the biggest global investment firms such as BlackRock, State Street Global Advisors, HSBC and Legal & General.

You’ll be able to track how your funds are performing through an online dashboard and once you reach 55 (57 from 2028) you can access your money in just a few simple steps. As long as there are no issues verifying your bank details, it will take around 10 working days for you to receive your money.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Last edited: 06-04-2024

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