How Capped Drawdowns Work
The capped drawdown plan works similarly to the Flexi-access pension that enables you to take out some capital from your pension savings flexibly. Provided that you’ve gracefully reached 55 years, you can withdraw up to 25% of your personal or workplace pension1 plan tax-free. You can then place the other 75% in a reliable investment plan and draw down the capital on an ad-hoc basis. Nonetheless, unlike a flexible access plan, if you have the capped pension drawdown, the amount you can take out is capped at specific amounts.
The Capped Pension GAD Limits
The capped pension drawdown withdrawals can’t surpass the maximum Government Actuary Department (GAD2) limit by over 150% in one pension year. One pension year is the 12-month period that immediately follows your initial pension drawdown. GAD rates for the capped pension are extensively calculated depending on what the average pension holder of the same age can receive from a lifetime annuity. GAD rates are evaluated every three years if you’re reached 75 years and under, and yearly if you’re over 75.
We’re not through yet,
Additional evaluations can happen when you request or be triggered if you opt to add more cash to your pension plan, buy an annuity with some part of the funds or divide your pension pot in a divorce settlement.
Tax Relief on Capped Pension Plan
Provided that you remain under your maximum drawing limit or cap, you can still pay into your pension pot as you were before you started accessing your fund. The yearly contribution limit for the 2020/21 financial year is €40,000, which consists of the capital paid in by you, your boss, and some tax relief from the authorities. If you surpass the maximum GAD limit, and drawdown more from your pension pot than the cap permits, you’ll automatically change your capped drawdown pension into a flexible access pension.
What does this mean?
If that happens, the Money Purchase Annual Allowance will be triggered, thus restricting your untaxed contributions to €4,000.
Transferring to a Flexible Drawdown Plan
It’s simple to change a capped pension to a flexible access pension. In addition to surpassing the maximum GAD limit, you can also alert your provider that you want to convert your pension plan or transfer your capped drawdown to a new lender who might automatically change your capped drawdown plan.
Capped Drawdown Death Benefits
Like other drawdown plans, if you pass away before 75 years, the remaining amount can be paid to a beneficiary untaxed in the form of a lump sum amount, flexible access drawdown, or an annuity scheme. If you pass on after reaching 75 years, your heirs will be charged an income tax at the set marginal rate.
What You Need to Consider
If you or your beneficiaries are looking to keep your annual allowance, you need to keep in mind that, even if you don’t go over the cap under your current capped drawdown plan, you can do it in other modes.
That means that if you can get another percentage of your pension fund flexibly; using the drawdown pension or through taking part or all the capital; or by withdrawing an amount from a flexible annuity, you’ll activate the lower MPAA (money purchase annual allowance) for your future defined contribution pension pot. That typically applies to any pension savings valued at €10,00 or more.
You can choose to convert capped drawdown plan to pension drawdown through a notification to your pension plan, instead of exceeding the cap. In that case, the MPAA is only activated when your initial income reimbursement is drawn from the Flexi-access pension.
It is good to know that,
The MPAA won’t apply to an heir who converts their beneficiaries capped drawdown plan to a dependent’s pension drawdown. It will only trigger if your loved ones accessed another pension fund valued at €10,000 or more flexibly.
Can You Switch Between Capped Drawdown Pension Providers?
Yes, you can. You can move your finances to a new pension provider provided that they’ll accept a capped pension drawdown transfer and that the move is on life for like foundation. The maximum revenue limit and review timescales also are transferred to the new lender.
You can also move to a new provider that offers a Flexi-access drawdown pension if you want. Nonetheless, that’ll activate a change to your yearly allowance from about €40,000 to €4,000.
Suppose you’re looking to transfer from one pension provider to another, but aren’t particular about the process involved. In that case, you can get capped drawdown pension advice from a reliable financial advisor and move on from there.
Got Questions? Check These First
What’s the Capped Drawdown Pension?
The capped drawdown pension was available before the 6th of April 20154, when the Flexi-access drawdown was launched. While it might not be accessible to a new investor, some still benefit from it.
If you have it, you can use it to take out a tax-free lump sum amount of up to 25% of your pension savings and also get taxable payments within the allowed limit and have the remaining funds invested.
How is the Capped Drawdown Calculated?
With the capped pension, your pension fund, after drawing out the tax-free amount, is invested into a pot that designed to provide you with a reliable income. On the assessment, every maximum revenue is calculated – centred on the edited fund proportion and existing GAD rates – and established for the next period.
What’s the Difference Between Capped and Flexible Access Drawdown?
You can draw down a capped income from the pension fund. However, with the flexible access drawdown, after the customer takes out the tax-free amount that’s usually 25% of the total amount, the rest of the capital is used to offer you a regular income or ad-hoc lump-sum amounts.
On What's the Maximum Capped Drawdown Pension Income-Based?
It’s usually 150%. The maximum income limit for the capped pension is typically 150% of the total amount. The basis amount is mainly equal to a single life, level, nil guarantee annuity that you can bring into the open market with the drawdown pension pot.
To sum up:
The Capped Drawdown Pension is a great way to protect your retirement if you are worried about what will happen in the future. It was designed with an easy-to-use yet powerful design that offers flexibility and security for those who plan on retiring soon or have already retired.