What is Capped Drawdown?
Capped drawdown is one form of unsecured pension whereby you draw an income from your pension fund as opposed to purchasing a guaranteed income through annuity. It replaced existing rules relating to Unsecured Pensions as well as Alternatively Secured Pensions (USP and ASP). The amount you can withdraw from your pension fund under capped drawdown in the equivalent maximum withdrawal from a comparable annuity, which is based on the current GAD rate. This has fallen from the previous level of 120% due to a fall in gilt yields. Your capped drawdown plan is reviewed every three years and then annually each year after you reach the age of 75.
Things you should be aware of…
- If you don’t want to, you do not have to draw an income at all
- Most can start this plan once they reach the age of 55 but there is no maximum age
- The withdrawal limit is reviewed every three years and is based on your pension fund size
- Should you pass away before your partner/spouse or dependent, an income can still be taken or alternatively can be used to buy an annuity. This is subject to tax at 55%.
Pro’s of Capped Drawdown
- You can take your money tax free as a lump just like with an annuity
- You can vary your income subject to annual limits
- You can take no income in some years should this be desirable
- No need to lock yourself into an annuity rate for life
- No need to deliberate on whether to include death benefits/widows pension
- Pension pot is invested so your income could rise in the future
Cons of Capped Drawdown
- If you buy an annuity in the future with the proceeds of your plan you could find that annuity rates have fallen
- Investments could perform badly so the value of your capped drawdown contract could fall
- The fund has to be reviewed every three years for which you will incur administration costs (not present with an annuity)
- You will not benefit from mortality cross subsidy which you would if you live long in retirement and purchase an annuity. The unused funds of those who die prematurely are in effect used to pay for those who live longer.