Capped Drawdown & Wealthy Pensions

March 2nd, 2015

Paul Wright, CEO of Eterna Private Clients, has given his view on the idea of wealthy pensioners going into capped drawdown before the upcoming pension reforms. Although we are getting closer and closer to April 6th, the idea does make for interesting reading.

“Wealthy pension savers should consider setting up a ‘capped drawdown’ plan ahead of freedom reforms in April to keep the tax benefits of paying up to £40,000 a year into their fund, he suggests.

Pension freedom reforms mean all over-55s will be able to access their full retirement savings and have the power to invest and withdraw money as they wish.

The drawback for the better off is that immediately you take advantage of flexible drawdown under the new rules, limits are placed on how much money you can then contribute to your pension pot and still automatically get tax relief.

This annual allowance falls from £40,000 to £10,000 a year, to prevent people recycling their savings to gain a tax advantage but you can keep your £40,000 annual allowance as long as you are in an existing ‘capped’ drawdown scheme on 6 April.

‘Capped drawdown is the facility that currently exists to allow over 55s to drawdown their pension and is subject to various restrictions.

‘This facility will cease to exist from 6 April 2015 for individuals drawing down on their pension for the first time, but will remain available for those that are already in it.

‘What few people realise is there is an enormous potential benefit associated with activating capped drawdown prior to 6 April which revolves around the level of tax relieved pension contributions that you can make moving forward.’

If you are already in a capped drawdown plan when freedom reforms take effect, you not only keep the £40,000 annual allowance on contributions but also the ability to ‘carry forward’ unused contributions – which means you can take advantage of your allowance from the previous three tax years too.

The maximum limit for carrying forward contributions is £180,000 in the 2015/2016 tax year.

Who could benefit from this tip?

* Wealthy people who have the means to drop £10,000-£40,000 a year into their pension pot, either now or in the future.

‘How much you currently intend to contribute to pensions should not impact upon your decision to activate capped drawdown, After all, why wouldn’t you give yourself the opportunity to make high pension contributions in the future?’

* Savers who are happy to stick with the old capped drawdown limits (see box) until at least 6 April 2016.

If you are in an existing capped drawdown scheme, you can easily switch to flexible drawdown after April since all over-55s are allowed to withdraw unlimited sums from their savings pot after that – if they are prepared to take the tax hit.”

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