The retirement landscape has change immensely in the past two years as “pension freedom” reforms have opened up the options for those entering a life after work.
Those changes have made “ drawdown” viable for a greater number of people. This is where a pension pot remains invested after retirement, with income taken from it.
However, the form of drawdown created after April 2015 by the reforms - known as “Flexi-Access Drawdown ”- differs from the forms of drawdown that were available before pension freedoms were introduced.
In particular it is different from “Capped Drawdown” that had been popular before 2015, and many already in Capped Drawdown may be wondering whether they should stick with that option or move to Flexi-Access Drawdown.
The guide below has been produced by Fidelity to explain the differences between the options, and the merits of switching.
Please note the Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.pensionwise.gov.uk or over the telephone on 0800 138 3944.
Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.
What is Capped Drawdown?
Capped Drawdown was a pension income option that closed to new applicants on the 6 April 2015. If you were already taking advantage of Capped Drawdown then you were allowed to continue with the arrangement, but anyone applying for pension drawdown after that date was offered Flexi-Access Drawdown.
So why was it called capped drawdown?
In a Capped Drawdown arrangement you can take your tax-free lump sum (usually 25% of the pot) and then whatever is left can be carefully invested into funds that can grow and provide you with a taxable income during your retirement.
The maximum income you can take is, however, capped. It cannot exceed 150% of the income rate the Government Actuary Department (GAD) set. This is broadly based on what the average person might expect to receive from a lifetime annuity (an insurance product that would use pension money to provide a guaranteed income for life).
To ensure the income remains comparable to the GAD rate, your provider is required to review the income rate for you every 3 years if you are under 75, and then annually after that. Providers calculate it against your remaining fund capital to give you a new Capped Drawdown income amount at each review point.
What are Capped Drawdown Income Limits?
If you withdraw an amount that exceeds your specified Capped Drawdown income limit then you will automatically be moved to Flexi-Access Drawdown.
If this happens then the income you can take will no longer be limited by the cap. The downside with this is that the amount of any defined contribution pension savings you can get tax relief on (your Money Purchase Annual Allowance) will dramatically reduce from £40,000 to £4,000 per tax year.
Once you move out of Capped Drawdown you cannot return so it is worth careful consideration before you make this decision.
Even if you don’t exceed your Capped Drawdown limits you could still trigger a lowering of your annual allowance to £4,000 (the MPAA) by accessing other pension pots using Flexi-Access Drawdown, taking some or all of a pension as a cash lump sum or by taking income from a “flexible annuity”. Taking just your tax-free cash, but no more, will not usually trigger the MPAA.
Moving from Capped Drawdown to Flexi-Access Drawdown
As mentioned above, if you have an existing Capped Drawdown scheme then it can be automatically converted to a Flexi-Access Drawdown by simply taking more than 150% of the annual income allowed. If you would prefer to be in Flexi-Access Drawdown but would rather not have to withdraw 150% of the income you’re allowed, then once you move your Capped Drawdown arrangement into a Fidelity SIPP, we can easily convert it to Flexi-Access Drawdown for you free of charge.
Once you’ve moved to Flexi-Access Drawdown you can take as much income as you like but you’ll be restricted to how much you can save into your SIPP annually and get tax relief on - reducing from £40,000 to £4,000.
To find out more call us on 0800 368 6882
Get your free drawdown illustration
To find out more about how Fidelity's Retirement Service can help you understand your pension income options and for your free illustration call 0800 860 0048. We're open 9am to 5pm, Monday to Friday.
The value of investments and the income from them can go down as well as up, so you may not get back what you invest. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Eligibility to invest into a pension and the value of tax savings depends on personal circumstances and all tax rules may change. You will not normally be able to access money held in a pension till the age of 55. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.