What’s a Capped Drawdown Pension?

Capped Drawdown Pension: Find Out What It Is

With unscrupulous lenders flooding the market, how do you which is the best plan for you? Well, lucky for you, here’s a detailed review of capped drawdown pension schemes, one of the most lucrative pension investments you can make for your retirement.
What’s A Capped Drawdown Pension

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

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

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.

Switch Between Capped Drawdown Pension Providers

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?

How is the Capped Drawdown Calculated?

What’s the Difference Between Capped and Flexible Access Drawdown?

On What's the Maximum Capped Drawdown Pension Income-Based?

In conclusion

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.


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