Capped drawdown: the closed pension income option

Capped drawdown is an older way of taking an income from a defined contribution pension, one that puts a legal ceiling on how much you can withdraw each year. It closed to new savers when the pension flexibility rules arrived on 6 April 2015, and since then anyone starting drawdown for the first time goes into flexi-access drawdown instead, which has no annual limit¹. But capped drawdown did not disappear: plans already running before that date continue under the old rules, and plenty of people are still drawing their retirement income from one.

The headline limit is that the maximum income is 150% of the limit set by the Government Actuary's Department (GAD), worked out as the income a healthy person of the same age could get from a lifetime annuity². Your pension provider sets the maximum amount you can take out every year, and that limit is reviewed every three years until you turn 75, then every year after that³.

Why does anyone still have one? The main reason is that income taken within the capped limits does not trigger the reduced savings allowance that flexi-access income does, which matters if you are still paying into a pension. More than 13 million people are now in defined contribution schemes offering drawdown, and the shift towards these schemes means drawdown of one form or another is now a standard part of retirement⁴. This page explains how a capped plan works, how the limit is set and reviewed, and what changes if you convert to flexi-access.

Capped drawdown sits alongside the newer flexi-access model

When the pension flexibility rules took effect on 6 April 2015, the government abolished the annual cap on pension drawdown for flexi-access drawdown funds⁶. From that date, the official guidance is blunt: "From 6 April 2015 there will be no limits on how much or how little you can take from your drawdown fund each year."¹

That change did not apply retrospectively. A capped drawdown plan set up before April 2015 keeps its structure: the fund stays invested, income is drawn within a provider-set maximum, and the plan is not forced to convert. The two models now sit side by side in the pension system, and which one you are in depends on when your drawdown started rather than on any choice you make today.

For anyone comparing the two, the practical differences are about control and consequences. Flexi-access gives complete freedom over the amount and timing of withdrawals, with every withdrawal taxed as income⁷. Capped drawdown restricts the yearly amount but, because income within the cap is not flexi-access income, it does not reduce the amount you can continue to pay into a pension, which the next sections explain. The comparison page on your options for taking money from a pension sets out where drawdown sits against annuities and lump sums.

How capped drawdown works

Capped drawdown keeps your pension pot invested while you draw an income from it. Your pension provider sets a maximum amount you can take out every year³. Within that maximum, the pattern of withdrawals is flexible: you can take a regular income, irregular amounts, or pause and restart, as long as the total stays inside the cap for the drawdown year.

The mechanics sit on top of the ordinary drawdown framework. When you put funds into drawdown you can take a tax free lump sum of up to 25% of your pension pot at the same time¹. The rest of the pot remains invested, so its value can fall as well as rise, and the income you draw comes out of that invested fund. All pension drawdown income is counted when calculating how much Income Tax you will pay each tax year, which runs from 6 April to 5 April, apart from the upfront lump sum worth up to 25% and 25% of other lump sums within limits⁸.

One point of terminology matters here. Only sums or assets held for providing money purchase benefits may be designated as available for drawdown pension for a member of an occupational pension scheme in Great Britain⁹. In plain terms, capped drawdown applies to money purchase (defined contribution) benefits, not to final salary or defined benefit pensions, which pay a promised income instead. If you have both types, the drawdown rules apply only to the money purchase side.

The income limit: up to 150% of an equivalent annuity

The central rule of capped drawdown is the annual income ceiling. The Government Actuary's Department (GAD) sets the maximum capped drawdown income at 150% of the income that a healthy person of the same age could get from a lifetime annuity². The figure is based on a table of rates prescribed by the Government Actuary's Department³, and it applies to arrangements purchased before 6 April 2015, when flexi-access drawdown was introduced¹.

The way the rule is framed is worth pausing on. The cap is not a percentage of your pot, and it is not a fixed cash figure. It is anchored to what an annuity would pay: the provider works out what level single life annuity income your fund could buy at the review date, and your maximum yearly drawdown income is up to 150% of that. Because annuity rates move with market conditions and your fund value changes as it is invested and drawn from, the basis amount, and so your cap, changes at each review.

Your pension provider sets the maximum amount you can take out every year³. In practice this means the provider does the calculation and tells you the figure: you do not work out the basis amount yourself. The cap applies per drawdown year, and the income you take within it is taxed as income in the normal way⁸.

Taking more than the capped limit is not possible within a capped plan. If you want withdrawals above the cap, the route is conversion to flexi-access drawdown, which has had no annual limits since 6 April 2015¹. That conversion has consequences for future pension contributions, covered under paying in while in drawdown below.

How the maximum income is worked out

The maximum income calculation starts from the equivalent annuity figure. The Government Actuary's Department sets the maximum capped drawdown income at 150% of the income that a healthy person of the same age could get from a lifetime annuity², and the calculation is based on a table of rates prescribed by the Government Actuary's Department³. Three inputs drive that figure.

The first is the size of your drawdown fund at the review date. A larger fund could buy a larger annuity, so the basis amount, and the 150% maximum, rise with it. The second is the prevailing annuity rates: the calculation uses what an equivalent single life annuity would pay at that point, so when annuity rates are higher, the cap is higher for the same fund. The third is the review date itself, because the figure is set at each review and then holds until the next one.

A single life annuity is the yardstick, meaning one that pays only for your lifetime with no survivor's pension. That is a measurement convention rather than a recommendation to buy one: the capped drawdown rules use it purely to produce a number. Your actual income choice inside the cap is separate.

Because the fund stays invested, the maximum can fall as well as rise between reviews if the fund has shrunk or annuity rates have moved. The cap is recalculated only at reviews, so a fund that grows strongly between reviews does not raise the limit early, and one that falls does not lower it early either. The review cycle is fixed, and the next section sets out how it runs.

Reviews: every three years, then yearly from 75

The review schedule is set by the rules rather than by your provider's discretion. The limit will be reviewed every three years until you turn 75, then every year after that³. At each review the income limit is recalculated, and the new maximum remains 150% of the limit set by the Government Actuary's Department².

The shift to yearly reviews at 75 reflects that the fund has less time to recover from market falls or heavy withdrawals in later life, so the cap is re-measured more often. Nothing else about the plan changes at 75 in terms of the cap itself: the same 150% of the basis amount calculation applies, just on an annual cycle.

The review is also the point at which you find out whether your income plans still fit. If you have been drawing the full maximum and the new maximum is lower, you either reduce your income or consider converting to flexi-access to keep drawing at the old level. If you have been drawing well below the cap, a review may simply confirm plenty of headroom. Either way, the provider carries out the review and issues the new figure; there is nothing you need to do to trigger it.

Tax-free cash: 25% of your pension

When you put funds into drawdown you can take a tax free lump sum of up to 25% of your pension pot at the same time¹. This is the standard tax-free cash entitlement across personal pensions: it includes taking up to 25% as tax-free cash¹¹. Pension Wise describes the same rule for adjustable income: you can "take up to 25% from your pension as a tax-free lump sum at any time from age 55 (rising to 57 from April 2028)"⁸.

For someone already in capped drawdown, this is usually history: the tax-free cash is normally taken when the fund first goes into drawdown. But two situations bring it back into play. If you did not take the full 25% at the start, the remainder may be available later, and the rules on the lump sum allowances govern how much. And if you have other pensions not yet touched, each pot carries its own entitlement, so a capped plan for one pot does not use up the tax-free cash on another.

The rest of your pension savings stay in the drawdown fund, and everything drawn from them as income is taxable. All pension drawdown income is counted when calculating how much Income Tax you will pay each tax year, apart from the upfront lump sum worth up to 25% and 25% of other lump sums within limits⁸. How the tax is collected, including why a first withdrawal is sometimes taxed at an emergency rate, is covered on how pension income is taxed and emergency tax on withdrawals.

Paying into your pension while in drawdown

This is where capped drawdown and flexi-access genuinely differ, and it is the reason many people have kept a capped plan. The Money Purchase Annual Allowance (MPAA) is triggered when you "start taking an income from your pot using pension drawdown" in the flexi-access sense¹². Once triggered, the amount you can pay into money purchase pensions each year falls to £10,000, a limit raised from £4,000 to £10,000 from 6 April 2023⁵. Which? describes the same rule: the limit "falls to £10,000 a year (known as the money purchase annual allowance or MPAA) once you access your" pension through drawdown or similar routes⁷.

Income taken within the capped drawdown limits does not trigger the MPAA, because it is not flexi-access income. That means someone in a capped plan can, in principle, keep paying into pensions with the full annual allowance available, rather than the reduced £10,000. The full annual allowance, carry forward of unused allowance from earlier years and the tapered allowance for very high earners are explained on the annual allowance and carry forward pages. Two restrictions apply once the MPAA is triggered: you cannot carry forward any unused allowances from previous years¹², and the trigger does not come from defined benefit pensions, since receiving an income from a defined benefit pension is excluded from the MPAA triggers¹².

For higher earners there is a separate limit to watch. If your adjusted income is over £260,000 and your threshold income is over £200,000 in the current tax year, the tapered annual allowance applies, reducing your allowance before the MPAA is even considered¹³. The tapered annual allowance page explains how those income measures are worked out.

The MPAA rules are detailed enough to have their own page: what is the money purchase annual allowance?. The short version for this page is that staying inside the capped limits preserves your ability to keep saving into a pension at the full allowance, and converting to flexi-access gives that up.

Capped or flexi-access: what changes if you switch

Converting a capped drawdown fund to flexi-access is a one-way move. The annual cap on pension drawdown was abolished for flexi-access drawdown funds⁶, so once converted, there are no limits on how much or how little you take from your drawdown fund each year¹. Your provider administers the conversion when you ask for the fund to be treated as flexi-access.

What you gain is freedom over withdrawals: any amount, at any time, with no review cycle and no basis amount calculation. What you give up has two parts. First, the MPAA consequence: taking income from a flexi-access fund triggers the £10,000 limit on future money purchase contributions, with no carry forward of unused allowances¹². Second, the discipline the cap imposed. The cap existed to pace withdrawals across an unknown lifespan; with no limit, the pacing decision is entirely yours, and the fund can be spent down faster than intended.

Who tends to suit each? A capped plan tends to matter to someone still contributing substantially to pensions, for whom the full annual allowance is worth more than unlimited withdrawals. Flexi-access tends to suit someone who has finished contributing, or who needs withdrawals above the cap, or who wants to manage the size and timing of withdrawals themselves. Both are taxed the same way on income drawn⁷, and both keep the fund invested with the investment risk that carries. The comparison page income drawdown or an annuity covers the wider choice between drawdown and a guaranteed income.

Transferring a capped drawdown plan

Transfers are possible after drawdown has started, but with conditions. Official guidance states that "in some cases, it's also possible to transfer to a new pension provider after you've started to draw retirement benefits"¹⁴. Whether the receiving provider can accept the fund as capped drawdown, or only as flexi-access, depends on the providers and plans involved, so the capped status is the key question to ask before starting.

The general mechanics of moving a pot between providers, including the checks involved and how long transfers can take, are covered on transferring pensions and investments to another provider. If a transfer would involve giving up a capped plan's advantages, or if you are unsure what a proposed move would do to your annual allowance position, that is the point at which free guidance from Pension Wise or regulated financial advice earns its keep.

What happens to a capped drawdown pot when you die

The tax treatment of what is left in your drawdown fund when you die depends mainly on your age at death. If you die before the age of 75 and leave money in pension drawdown, your beneficiaries do not have to pay Income Tax on the money they withdraw¹⁵. Which? puts the same rule positively: "If you die before 75, your beneficiaries can access any money remaining in your drawdown plan tax-free."⁷

If you die at 75 or over, your beneficiaries will have to pay Income Tax on any income they take from your drawdown plan¹⁵. The same source is explicit that "if you're over 75 when you die, the money you pass on will be taxed as income"⁷. Lump sums follow a parallel rule: a drawdown pension fund lump sum death benefit payment is taxable if the member or beneficiary was 75 or over when they died, or if the lump sum was not paid within two years of the provider finding out about the death¹⁶. Which?'s summary table shows the same split, with income tax applying to inherited drawdown funds where the deceased was over 75¹⁷.

On inheritance tax, the current position is that any money left in your pension or drawdown plan when you die is exempt from inheritance tax, though that is set to change⁷. The government has consulted on the inheritance tax treatment of pension scheme drawdown funds on death, a policy that applies to personal representatives and beneficiaries of registered pension scheme members who had unused pension funds at the time of their death¹⁸. Because the rules here are in transition, the pages on what happens to your pension when you die, pensions and inheritance tax and nominating a beneficiary carry the detail, and keeping your beneficiary nomination up to date with your provider matters for making sure the right people are paid.

Where to get free help

Capped drawdown sits in the middle of some genuinely technical rules: an income cap tied to annuity rates, a review cycle that changes at 75, and an annual allowance position that depends on which type of drawdown income you take. Free, impartial help exists for exactly this.

Pension Wise offers free guidance for people aged 50 and over with a defined contribution pension, covering what adjustable income is and how the options work⁸. MoneyHelper covers the basics of personal pensions, including taking up to 25% as tax-free cash¹¹. Appointments can cover whether your capped plan still fits, what converting to flexi-access would mean for your contributions, and how your drawdown income interacts with your tax position. Guidance explains the rules; it does not recommend a product or a provider. For a personal recommendation, a regulated financial adviser is the route, and the Pension Wise page explains how the free service works and how to book.

If something goes wrong with a provider or an administrator, complaints can be taken to the Pensions Ombudsman, and the process for complaining about a provider is set out on complaining about a pension provider.