What is the difference between capped drawdown and flexi-access drawdown?

Full answer

Capped drawdown was the primary flexible pension access option before the 2015 pension freedoms transformed the landscape, and while it can no longer be newly set up, understanding the difference matters for anyone still holding an older capped drawdown arrangement. **Capped drawdown -- the pre-2015 approach** Under capped drawdown, the amount you could withdraw from your pension each year was restricted to a maximum limit, calculated using Government Actuary's Department (GAD) tables linked to gilt yields and your age, broadly designed to prevent someone withdrawing so much, so quickly, that they would run out of pension income later in retirement -- this cap was reviewed periodically (originally every 3 years, later every year) and adjusted as gilt yields and life expectancy assumptions changed. **Flexi-access drawdown -- the post-2015 approach** Since April 2015, flexi-access drawdown has replaced capped drawdown as the option available to new pension savers accessing their pension flexibly -- there is no annual limit on how much can be withdrawn (up to the full remaining fund value), giving savers complete freedom over how quickly or slowly they draw down their pension, though any withdrawal beyond the tax-free Pension Commencement Lump Sum portion is taxed as income at the saver's marginal rate in the year it is taken. **What happened to existing capped drawdown arrangements** People who had already set up capped drawdown before April 2015 were given the choice to either continue within their existing capped drawdown arrangement (remaining subject to the GAD-based annual withdrawal cap) or convert to flexi-access drawdown to access the same freedom as new savers -- some people have chosen to remain in capped drawdown, particularly if staying under the cap helps them avoid triggering the lower Money Purchase Annual Allowance that applies once flexible income is taken beyond tax-free cash. **The Money Purchase Annual Allowance trigger** A critical practical difference is that taking an income withdrawal under flexi-access drawdown (beyond the tax-free lump sum) triggers the Money Purchase Annual Allowance, severely restricting further tax-relieved pension contributions to a much lower annual limit going forward -- capped drawdown withdrawals that stay within the GAD cap do not trigger the MPAA, meaning someone still working and wanting to keep contributing significant amounts to a pension might specifically want to remain in capped drawdown (staying within the cap) rather than converting to flexi-access drawdown and losing this advantage. **Worked example** A 62-year-old set up capped drawdown in 2013 and has continued taking withdrawals within her periodically reviewed GAD cap ever since, while also still working part-time and contributing to a separate workplace pension. Because she has remained within her capped drawdown limit and never converted to flexi-access drawdown, she retains the full £60,000 Annual Allowance for her ongoing workplace pension contributions, rather than being restricted to the much lower £10,000 Money Purchase Annual Allowance that would apply if she had instead taken a flexible income withdrawal under flexi-access drawdown. **Practical tip** Anyone still holding an older capped drawdown arrangement and still making meaningful pension contributions elsewhere should think carefully before converting to flexi-access drawdown or withdrawing beyond their GAD cap, since doing so triggers the Money Purchase Annual Allowance permanently and cannot be reversed, potentially significantly restricting future tax-relieved pension saving.

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