It is possible to continue pension contributions while in capped drawdown (although not into a drawdown plan which can only hold crystallised funds). Any required income (within certain limits) can be withdrawn directly from the fund, or indirectly by purchasing a short-term annuity. But rather than buying an income using an annuity with the remaining funds, the funds continue to be invested within a crystallised pension. At the point of crystallisation, the client can usually take a PCLS, tax-free, from the pension fund. The basics of a capped drawdown contract are relatively simple.
if the scheme allows, new funds can be designated to the existing capped arrangement and income can be drawn under this arrangement as per capped drawdown rules(however this may not be possible with some providers’ arrangements in which case they would require a new flexi-access drawdown arrangement to be set up for any future designations).before the new funds are designated, the existing capped drawdown arrangement can be converted into a flexi-access drawdown fund and the additional designation applied to flexi-access, or.After April 2015, new funds designated under that arrangement present two options: If on 5 April 2015 a capped drawdown fund was already in place, this arrangement can be retained. Post 6 April 2015 capped drawdown is no longer available for new arrangements. The introduction of flexi-access drawdown also saw the introduction of ‘Uncrystallised funds pension lump sum’ (UFPLS)įor capped and flexi-access drawdown, the income can be provided direct from the fund, or from a short-term annuity. The funds of pension holders, who selected flexible drawdown prior to 6 April 2015, automatically became flexi-access on that date. While capped drawdown remains for pension holders who elected this option before 6 April 2015, all flexible drawdown plans have been replaced by flexi-access drawdown. However, this limitation was removed following principle objections to the requirement to purchase a lifetime annuity by the Plymouth Brethren and others.įrom April 2011 until the introduction of the Taxation of Pensions Act 2014 on the 6 April 2015, there were two types of drawdown contracts – capped drawdown and flexible drawdown. In the early days of drawdown contracts it was still a requirement to secure a pension by purchasing an annuity by age 75. Those rules have been subject to various amendments over the years and we will only cover the relevant versions in this article. They could then draw an income from the drawdown contract, as long as they stayed within HMRC rules. Drawdown introduced an alternative to annuities, in that a client could take their tax-free lump sum (Pension Commencement Lump Sum, PCLS) and designate the balance of the pension funds to a drawdown contract. Short-term annuities allow some or all of a drawdown pension to be used to buy an income for a short, fixed period – up to a maximum of five years.īefore drawdown was introduced in 1995, a pension holder (not being offered a scheme pension) had no choice but to buy an annuity at the point of taking benefits.Please note, once funds are designated to Drawdown, no further tax-free lump sum can be paid from Drawdown pot. There is no requirement to purchase an annuity but the fund can be used to buy an annuity. The client can decide the frequency and level of regular income and/or lump sums. With flexi-access drawdown, after the client has taken the available tax-free lump sum which is normally 25% of the amount moved to drawdown, the remainder can be used to provide either a regular income and/or ad-hoc lump sums.A ‘capped’ (limited) income can be withdrawn from the fund. Capped drawdown (for schemes in place before 6 April 2015) lets clients take a tax-free lump sum, then continue to invest the remainder within a crystallised pension.The most appropriate method will depend on whether your client’s scheme was in place before 6 April 2015, and their particular aims and objectives. Specific approaches include capped drawdown, flexi-access drawdown and optional, short-term annuities.Drawdown allows most pension holders to take a tax-free lump sum and reinvest the remainder to provide an income.
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