If you began drawing down on your retirement income before April 2015, you may be using a capped pension drawdown plan. Navigating the capped drawdown pension rules can be complex, and it’s crucial to ensure your pension is set up in the best way.
Here, we’ll explain exactly what a capped drawdown pension is, how the rates and limits work, the options available for your existing plan, and where to find independent advice to help you manage your income in retirement.
What is capped pension drawdown?
It’s a legacy retirement income product for defined contribution (DC) pensions. It allows you to keep your pension pot invested while drawing a regular or ad-hoc income from it. However, the amount of income you can withdraw each year is restricted to a maximum limit - the cap.
This pension drawdown cap was designed to prevent retirees from depleting their pension pots too quickly, ensuring the funds would last throughout their retirement.
Do pension providers still offer capped drawdown?
No, UK pension providers don’t offer new capped drawdown plans. Because capped drawdown pensions were replaced by flexi-access drawdown in April 2015, you cannot open a new plan today.
However, if you already have a capped pension drawdown plan set up before that date, you can continue to use it under the original rules, provided you don't exceed your withdrawal limits.
Some major capped drawdown pension providers (such as Standard Life, Royal London, Aviva, and others) continue to administer and manage existing plans.
Your options with an existing capped drawdown plan
If you currently hold a capped pension drawdown plan, you have four main options:
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Keep your current plan: You can continue to draw an income within your maximum permitted limits. Your provider will review your cap regularly to ensure it aligns with your fund's value and your age.
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Convert to flexi-access drawdown: If you let your provider know you want to remove the cap and switch to flexi-access, this gives you more freedom over withdrawals. But, it will permanently trigger the Money Purchase Annual Allowance (MPAA), restricting your future tax-relieved pension contributions to just £10,000 per year.
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Transfer to a new provider: If you’re unhappy with your current provider’s fees or investment performance, you can transfer elsewhere. However, you must find a provider willing to accept it on a "like-for-like" basis. Unless the new provider explicitly supports capped transfers, you may be forced to convert to flexi-access.
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Purchase an annuity: You can use some or all of your remaining drawdown pot to buy an annuity, guaranteeing a secure level income for the rest of your life.
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Capped pension drawdown rules
If you want to manage an existing plan, it’s worth understanding the strict pension capped drawdown rules. Here are the key rules and regulations you need to be aware of:
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The 150% limit: Your maximum income is capped at 150% of the rate provided by the Government Actuary’s Department (GAD). This rate is essentially an estimate of the income a healthy person of your age could generate if they bought a standard lifetime annuity with your fund.
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Review periods: Your capped drawdown limit is not fixed forever. Your provider must recalculate your maximum income every three years until you reach age 75. Once you turn 75, the reviews take place annually. You can also request a review at any time, but whether you’re granted one is up to the scheme administrator.
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Breaching the cap: If you accidentally (or intentionally) withdraw more than your maximum GAD limit in a single “pension year”, your plan will automatically convert into a flexi-access drawdown scheme. You cannot undo this, and your annual allowance for future contributions will immediately drop to £10,000.
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New pension rules capped drawdown impact: Following the removal of the Lifetime Allowance (LTA), new rules like the Lump Sum Allowance (£268,275 for most) apply. While this mainly affects your tax-free cash, how your drawdown funds are treated upon your death has also evolved - making regular pension reviews essential.
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Pension sharing order capped drawdown: If you go through a divorce and your pension is subject to a pension sharing order, the value of your fund will decrease. Under the rules, your maximum income cap will need to be officially recalculated by your provider at the start of your next pension year to reflect the reduced fund size.
Capped drawdown pension calculator
Working out your exact limits manually is incredibly difficult because GAD rates fluctuate based on 15-year gilt yields, your exact age, and the day your review is triggered.
You’ll likely need to have your provider confirm your current maximum GAD so you don’t enter a monthly withdrawal amount that exceeds your cap.
However, you can use our pension drawdown calculator below to estimate how long your overall funds might last based on different withdrawal amounts:
Best alternatives to capped pension drawdown
If you want to avoid the restrictions and rules of the pension drawdown cap, there are more flexible alternatives available:
Flexi-access drawdown
The modern standard for pension flexibility, it allows you to take out as much or as little as you want, whenever you want. However, the trade-off is the strict £10,000 MPAA limit on future contributions.
Annuities
If you want greater certainty about your retirement income, you might want to consider converting your drawdown pot into a pension annuity.
This guarantees a certain level of income that will never run out (unless you opt for a fixed term), and depending on your health, you might qualify for enhanced rates. There are also other options, such as index linked annuities or joint life annuities.
Uncrystallised Funds Pension Lump Sum (UFPLS)
Instead of moving funds into drawdown, UFPLS allows you to take ad-hoc lump sums directly from an untouched pension pot.
With phased pension drawdown like this, each withdrawal is 25% tax-free, with the remaining 75% taxed as income.
Get 100% independent pension advice
Managing a capped drawdown plan is a delicate balancing act. You need to maximise your investment returns, carefully plan your withdrawals to stay under the GAD limits, and protect your £60,000 annual allowance if you are still saving.
Here’s why retirees choose Money Helpdesk when navigating capped drawdown pensions:
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Access to independent, FCA-regulated pension advisers
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Help managing and planning your long-term income
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Guidance on whether it makes financial sense to explore alternatives
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A free initial consultation with no obligation to proceed further
If you’d like help understanding your capped drawdown options, you can arrange a free, no-obligation chat with an independent pension adviser here.
FAQs
These are determined by the Government Actuary’s Department (GAD). The rate dictates the maximum amount you can withdraw.
It’s calculated using a combination of factors, including: your age, the value of your pension fund at the review date, and the current yield on 15-year UK government gilts.
Because gilt yields change monthly and your fund value fluctuates daily, your bespoke rate will be entirely unique to you and must be calculated by your provider or an actuary.