Incrementing Capped Drawdown

Following the introduction of the 'Pensions Freedoms' on 6 April 2015, a client who 'flexibly accesses' their pension benefits is subject to an annual £4,000 cap on money purchase pension contributions – the money purchase annual allowance (MPAA).

The limit, which translates to £333 per month gross, applies to all plans collectively and all types of contributions (personal, employer and third party), severely restricting the ability to build up further pension benefits.

Flexible access includes, amongst other things, receipt of flexi-access drawdown income, income from flexible annuities and certain small scheme pensions, uncrystallised funds pension lump sums and capped drawdown income in excess of the maximum withdrawal limit. It also includes the set-up of flexible drawdown prior to 6 April 2015, which triggers the MPAA from that date.

The effect of this rule is that anyone who wishes to take advantage of the Pension Freedoms will be constrained in their ability to build up further benefits. In this regard, those individuals who have maintained a capped drawdown contract - that must have been established before 6 April 2015 - have an advantage: the ability to receive drawdown income without triggering the £4,000 MPAA.

In addition, they can transfer the benefits between pension schemes and can pay further uncrystallised funds into the drawdown arrangement, which should increase the maximum withdrawal limit.

To take advantage of this facility:

  • The withdrawal limit for the capped drawdown contract must not have been exceeded after 5 April 2015,
  • The client must not have required the provider to convert the contract to flexi-access drawdown,
  • The contract must allow further designations of uncrystallised funds into the capped drawdown arrangement. If a new separate arrangement is established for increments, this separate arrangement will be flexi-access drawdown.

If the existing capped drawdown arrangement cannot be incremented, the client could consider transferring to a contract that can facilitate this.

An increment of uncrystallised funds to a Scottish Widows capped drawdown contract is paid into the existing arrangement.

18 April 2018

Ability to receive drawdown income without triggering the £4,000 MPAA