Phased Capped Drawdown

Published / Last Updated on 02/07/2021

This option is not open to most people if they did not have an existing Capped Drawdown pension in place prior to 6th April 2015.

If you do have an existing Capped Drawdown product in place prior to 6th April 2015 you can choose to transfer your other pension funds (or remain with your existing provider) to that scheme (if the existing capped drawdown scheme will accept transfers in to capped drawdown) and utilise an older style unsecured pension option called phased capped drawdown.

Capped drawdown in its simplest form is where you take the 25% tax-free lump sum and the balance of the fund can be drawdown yearly subject to a maximum drawdown % cap (usually around the same rate as the annuity rate for your age) with maximum drawdown rates set by the Government Actuary Department (GAD) e.g.  4% pa of fund value.  This maximum rate is reviewed every 5 years.

Phased capped drawdown works on the same principle as Phased Retirement Annuities.  It delivers this by dividing the pension fund into a number of identical policies within the plan.  Imagine your pension plan is divided say into e.g.100 mini pension pots.

Phased capped drawdown provides an alternative means of obtaining income by encashing a required number of policies in stages e.g.  encash 10 of your 100 pots to utilise the 25% tax free cash from those 10 pots only and then drawing down an income within GAD rates from the 75% balance of those same 10 pots.  The remaining 90 pots remain investing in full until you are ready to increase tax free cash taken and/or higher drawdown income amounts (within the GAD rates cap) in the future e.g.  on an annual basis. 

This gives you the facility of varying future income (within Government Actuary Department income guidelines) and tax-free cash levels to fit in with your overall financial plan and circumstances.  Only the part of your pension fund moved into the capped drawdown pot will be treated as crystallised benefits. 

Any of your pension money that is not in the capped drawdown pot will be treated as a normal personal pension plan, still invested and not crystallised.  Until Government changes in 2014, this had financial benefits in the event of death, as there was a 55% tax charge for any lump sum payments out of a crystallised capped drawdown pension. 

This gives you the facility of varying future income (within Government Actuary Department income guidelines) and tax-free cash levels to fit in with your overall financial plan and circumstances.  Only the part of your pension fund moved into the capped drawdown pot will be treated as crystallised benefits. 

Any of your pension money that is not in the capped drawdown pot will be treated as a normal personal pension plan, still invested and not crystallised.  Until Government changes in 2014, this had financial benefits in the event of death, as there was a 55% tax charge for any lump sum payments out of a crystallised capped drawdown pension. 

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.

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