I’m a bit confused about the new pension drawdown rules. What’s the difference between flexi-access drawdown and the old income drawdown rules? Is flexi-access drawdown just a new name for flexible drawdown? Also, the old income drawdown rules used to include capped income drawdown but this doesn’t seem to be mentioned anymore. Has capped drawdown been abolished?
As you mention before the April 2015 pension freedoms there were two types of income drawdown available: flexible income drawdown and capped income drawdown.
Different Types of Pension Drawdown
What is Flexible Drawdown?
Flexible income drawdown was most similar to the new flexi-access drawdown contracts available today. It placed no limit on the amount you could withdraw from your pension in a mixture of income and lump sum payments as you required.
The only condition was that you had to have a guaranteed pension income elsewhere of £12,000 a year to use flexible drawdown, which meant it was largely geared towards wealthier pensioners.
What is Capped Drawdown?
Capped drawdown was the alternative to flexible drawdown for those without the required guaranteed pension income.
As the name suggests, capped income drawdown placed a cap on the amount you could withdraw from your pension. This was 150% of the value of a single life annuity that a person of your age could purchase based on rates from the Government Actuary’s Department.
What is Flexi-Access Drawdown?
Flexi-access drawdown is now the only type of drawdown contract available to new customers following the April 2015 pension freedoms.
There’s no minimum income requirement to make use of flexi-access drawdown. It works by allowing you to create your own flexible schedule of lump sum and income payments from your pension as required.
Do I Need to Move Old Drawdown Pensions to Flexi-Access Drawdown?
If you were in flexible drawdown before April 2015, you’ll automatically have been transferred to flexi-access drawdown. You won’t have to do anything.
If, however, you were in capped income drawdown before the pension freedoms then you won’t have moved automatically. You can choose to stay in capped income drawdown or move to flexi-access drawdown, either actively, by notifying your pension provider, or simply by breaching the old cap that was in place and taking more from your pension than you were entitled to under the old rules.
While flexi-access drawdown offers more freedom and flexibility than capped income drawdown, one of the major benefits of staying in capped drawdown is that you retain your full pension annual allowance (the amount you can pay into your pension each year and still get tax relief).
With flexi-access drawdown, your annual allowance is reduced once you start taking an income — this is known as the money purchase annual allowance and currently stands at just £4,000 per year compared to a maximum of £40,000 per year otherwise.