Capped Drawdown was replaced for all new drawdown plans by Flexible Drawdown rules after 6th April 2015. Therefore, this option is now not open to most people if they did not have an existing Capped Drawdown pension in place prior to 6th April 2015.
If you have an existing Capped Drawdown product set up and in place prior to 6th April 2015 you can choose to transfer other pension funds to your existing capped drawdown scheme (if the pension company will allow it) and utilise this older style unsecured pension option still called Capped Drawdown.
Under old capped drawdown rules, you would have been and still can take all available tax-free cash (pension commencement lump sum) at the outset and then drawdown an income from the fund (if you need it) subject to limits set within Government Actuary Department (GAD) income guidelines (see below). This income can be varied when you choose to (within limits) and you do not have to take any income at all if you do not want to.
GAD and Lump Sums In Action
Capped drawdown in its simplest form is where you take the 25% tax-free lump sum and the balance of the fund can then be drawn down yearly subject to a maximum drawdown % cap (usually around the same rate as a single life annuity rate for your age) with maximum drawdown rates set by the Government Actuaries Department (GAD) e.g. at age 55 it could be 4% pa of fund value. This maximum drawdown rate is reviewed every 5 years.
Full Capped Drawdown
If you want to take the full tax-free cash lump, you must take it all at the outset. If you take the full amount of tax-free cash available, then your entire pension fund will be crystallised with the balance of the fund in capped drawdown under GAD rate limits.
Tax On Death
Until Government changes in 2014, there was a 55% tax charge for any lump sum payments out of a crystallised (i.e. tax free cash already taken) capped drawdown pension fund on death.
Now, there is no tax charge for either crystallised or uncrystallised pension benefits, currently if death occurs before age 75. If death occurs after age 75 and a lump sum is paid out to a beneficiary, all money drawn by the beneficiary will be taxed at their marginal rate. If the beneficiary continues with drawdown, then tax is also payable at their own marginal rate.