What is capped drawdown?

If you have a defined contribution pension, pension drawdown lets you take up to 25% as a tax-free lump sum and leave the rest invested, which you can then take at a later date.

This means:

• your pension can continue to benefit from investment growth

• you can take income from it as and when you need it – there’s no minimum income you must take each year.

If you have a capped drawdown pension (available before 6 April 2015), you cannot take more than a certain limit each year or you’ll be moved to a different product. This limit is called a cap and is based on:

• the current value of your pension

• a rate calculated by the Government Actuary’s Department’s (GAD).

The idea is that you can only take income each year worth up to one and a half times the amount a lifetime annuity could provide a healthy person of a similar age.

A lifetime annuity is where you convert your pension pot into guaranteed income until you die. 

The cap on your investment income is recalculated:

• if you move other pensions into your capped drawdown arrangement

• every three years if you’re under age 75

• annually if you’re age 75 or over. 

This means it can rise, fall or stay the same each time it’s reviewed.

When you pay into a pension, you usually benefit from tax relief – where the money you’d normally pay in Income Tax is added to your pension instead. 

You can benefit from tax relief as long as:

• your total contributions are less or equal to the amount you earn and 

• all payments in, including any from you and your employer, are less than your annual allowance – which is £60,000 for most people. 

Usually, when you start taking taxable money from your pension, a lower £10,000 limit is triggered – called the money purchase annual allowance (MPAA). But this does not apply to capped drawdown.

If you have other pensions, be aware the MPAA is triggered if you:

• start to take your pension as multiple lump sums 

• take your entire pension in one go – unless it’s worth under £10,000 and you ask your pension provider to use small pot lump sum rules

• take a regular income from:
  • a pension drawdown scheme set up since 6 April 2015
  • an investment-linked or flexible annuity, where the income isn’t guaranteed.

For more information, see our guide about the money purchase annual allowance (MPAA).

Over time, you can expect to see overall growth of your invested pension.

This is because your provider will usually use a mix of investments to balance the risk – so if some investments go down, hopefully the others will stay the same or increase. 

You might also be able to decide which funds to invest in. Find out more in our guide How to choose your own pension investment options.

But investment growth is never guaranteed, so the value of your pension can rise and fall until you take the money.

If you take income that’s higher than the cap, your provider will automatically change your capped drawdown into a normal drawdown arrangement – often called flexi-access drawdown. You cannot undo this.

This means there’ll be no cap on how much you can withdraw, but you’ll trigger the money purchase annual allowance (MPAA). The MPAA might affect how much tax relief you can benefit from if you continue paying into a pension. 

After the MPAA has been triggered, to qualify for tax relief each tax year (6 April to 5 April): 

• your total contributions must be less or equal to the amount you earn and 

• all payments in, including any from you and your employer, must be less than £10,000. 

For more information, see our guides:

• Take money from your pension when you need it: pension drawdown explained

• How tax relief boosts your pension contributions. 

You cannot set up a new capped drawdown pension, but you can:

• keep your existing capped drawdown by not exceeding the cap

• move other pensions into your existing capped drawdown – if your provider allows this

• transfer your capped drawdown scheme to another provider – if your provider allows this and the two schemes are like-for-like 

• choose to convert your capped drawdown into flexi-access drawdown, so there’s no cap on the income you can take

• choose to take your pension in a different way, such as converting some or all of the money into guaranteed income by buying an annuity.

If you choose to convert a capped drawdown plan into flexi-access drawdown, you’ll usually trigger the money purchase annual allowance (MPAA) when you first take taxable income.

But this does not apply if the plan is inherited — in most cases, your beneficiaries could access an inherited capped drawdown or flexi-access drawdown without triggering the MPAA.

For all the ways you can take money from a defined contribution pension, see our guide What can I do with my pension pot?

If you’re thinking of making changes to your capped drawdown scheme, it’s worth considering paying for financial advice to help make sure it’s the best thing for you.

Our tool can help you find a retirement adviser  or see our guide Choosing a financial adviser for more information. 

You must be told how much the advice will cost before you commit.

You can tell your capped drawdown provider who you’d like to inherit your remaining pension pot by completing their expression of wish form. This is called nominating your beneficiaries. 

Your provider doesn’t usually have to follow your instructions, but they normally will.

It’s a good idea to regularly review and update your nominations, especially if things change – like a divorce or separation.

Whether your beneficiaries need to pay Income Tax on your inherited pension depends on how old you are when you die.

If you die:

• after you reach age 75, your inherited pension will be added to your beneficiary’s earnings to calculate how much Income Tax they need to pay

• before age 75, your pension can be inherited tax-free as long as the money is paid within two years of the provider learning of your death – otherwise it’s taxable. 

If you moved any money into drawdown after 6 April 2024 and you die before age 75, that part would be counted by the lump sum and death benefit allowance (LSDBA).

The LSDBA is the maximum amount of tax-free cash that can be taken from your pension before and after you die, set at £1,073,100 for most people.

Until April 2027, your capped drawdown plan will usually not be counted when calculating Inheritance Tax – as long as your scheme is able to decide who to pay the money to. This means the scheme rules allow them to choose whether or not to follow your expression of wish form. 

For more information, see our guides:

• What happens to my pension when I die?

• Tax-free pension lump sum allowances.

If you have any questions about your pension, our pension specialists can help – it doesn’t matter how old you are.