PTM062701 - Member benefits: pensions: drawdown pension rules applying from 6 April 2015: overview of drawdown pension rules applying from 6 April 2015
As of 6 April 2024 there is no longer lifetime allowance. If you are looking for information about protections, enhancement factors and the lifetime allowance charge please see these pages on The National Archives. If you are looking for information about the principles of lifetime allowance and benefit crystallisation events please see these pages of The National Archives.
Glossary PTM000001
Bringing a drawdown pension into payment
Flexi-access drawdown or capped drawdown pension?
Using part or all of the funds in a scheme or arrangement to provide drawdown pension
Age when a drawdown pension can start
Types of drawdown: income withdrawal or short-term annuity
Taxation of drawdown pension
Continuing to pay contributions into any pension scheme once drawdown has started
Transferring a drawdown pension
Using a flexi-access drawdown or drawdown pension fund to purchase a lifetime annuity or provide a scheme pension
Section 165, pension rule 4, Finance Act 2004
Drawdown pension can be paid only from other money purchase and cash balance arrangements. Defined benefits arrangements cannot pay drawdown pension. Pension schemes do not have to pay benefits as drawdown pension and many schemes do not offer this option.
Drawdown pension can be flexi-access drawdown or capped drawdown pension - see Flexi- access drawdown or capped drawdown pension? below. Capped drawdown is available only where funds were first designated under an arrangement before 6 April 2015.
Bringing a drawdown pension into payment
Paragraph 8 or 8A schedule 28 Finance Act 2004
The member starts a drawdown pension by ‘designating’ part or all of their uncrystallised pension funds to provide them with a drawdown pension. An existing scheme pension or lifetime annuity cannot be converted into drawdown pension. Designation means that the member tells their scheme administrator that they want to use a specific monetary amount to provide them with a drawdown pension. The funds that have been put aside (designated) to provide a drawdown pension form the member’s drawdown fund. The member's drawdown pension will be paid from that fund. The type of drawdown fund depends on the type of drawdown pension – see Flexi-access drawdown or capped drawdown pension? below.
Each pension scheme that offers drawdown will have its own processes for documenting how members designate benefits into drawdown pension.
Having designated funds into a drawdown pension fund, the member can then choose the amount and timing of the payment of their drawdown pension. They can choose to get regular payments or just draw funds when they want to. The member will need to agree this with their pension scheme which may have specific rules about how a drawdown pension can be paid.
When a member designates funds into drawdown pension, they may choose to take a pension commencement lump sum in connection with drawdown (see PTM063200). But there is no requirement to take a pension commencement lump sum. All the funds in an arrangement can be used to provide a drawdown pension.
Flexi-access drawdown or capped drawdown pension?
The tax rules for drawdown pensions changed from 6 April 2015 to allow greater flexibility in paying pensions. Drawdown pension will be paid either as:
- flexi-access drawdown from a flexi-access drawdown fund
- capped drawdown pension from a drawdown pension fund.
Flexi-access drawdown
Paragraph 8A schedule 28 Finance Act 2004
Drawdown pension will be flexi-access drawdown if:
- the member first designated funds under the arrangement to provide drawdown pension on or after 6 April 2015 – see PTM062730 for more detail
- on 5 April 2015 the member could receive drawdown pension under the arrangement payable as flexible drawdown - see PTM062740 for more information
- on 5 April 2015 the member was in capped drawdown and later converted to flexi-access drawdown. PTM062750 provides guidance on how a member can convert from capped to flexi-access drawdown.
Flexi-access drawdown for a member is provided from their flexi-access drawdown fund.
With flexi-access drawdown there is no minimum or maximum amount that a member can take in any tax year. The member can choose to draw as much or as little pension as they like in any year. Subject to what the pension scheme rules allow, in any year the member could choose to take:
- no payment of drawdown pension
- a regular series of payments
- an irregular payment stream
- their whole flexi-access drawdown fund as a single payment.
Capped drawdown pension
Paragraph 8 schedule 28 Finance Act 2004
Drawdown pension will be capped drawdown where all the following conditions are met:
- the member first designated funds under the arrangement to provide drawdown pension before 6 April 2015
- on 5 April 2015 that drawdown pension was payable as capped drawdown
- the member has not converted their drawdown pension fund to flexi-access drawdown.
Capped drawdown pension for a member is provided from their drawdown pension fund.
For individuals with capped drawdown pension the guidance at PTM062520 to PTM062570 continues to apply to their drawdown pension funds after 5 April 2015.
Section 165, pension rule 5, Finance Act 2004
There is no minimum amount of drawdown pension a member must take each year. This means that a member may designate funds for drawdown but not actually take any pension income from it if they do not want to. With capped drawdown, as the name suggests, there is an annual limit on the amount of drawdown pension that may be paid to a member.
If an individual chooses to continue to receive drawdown pension as capped drawdown pension after 5 April 2015 the limit described at PTM062530 continues to apply. If in any year this annual limit is exceeded the capped drawdown fund will convert to flexi-access drawdown – see PTM062750.
There can be only one drawdown fund per arrangement. Where a member has a capped drawdown pension fund under an arrangement and also has uncrystallised funds under the same arrangement, any designation of those uncrystallised fund will be for more capped drawdown pension, even after 5 April 2015.
Using part or all of the funds in a scheme or arrangement to provide drawdown pension
A member does not have to use all of their funds in a pension scheme to provide drawdown pension. Drawdown pension is provided at ‘arrangement level’ as opposed to ‘scheme level’. Each pension scheme can be a single arrangement or split into 2 or more pension arrangements. Generally, each arrangement can pay benefits separately from the other arrangements. This allows benefits to be taken in stages, at different times.
Traditionally, personal pension schemes have been split into many arrangements for one person allowing them to stage pension payments over a period of time. Occupational pension schemes have not tended to do this. But there is no reason why an occupational pension scheme cannot be designed to have lots of arrangements for each member. This is a matter for the employer and scheme trustees to decide when designing their pension scheme.
What this means is that funds can be designated in one arrangement to provide a drawdown pension, with funds left in other arrangements until a later date, all within the same scheme. A member can take drawdown pension from different arrangements under a pension scheme at different times.
A member also does not have to use all of the funds in a pension arrangement to provide a drawdown pension. If the scheme allows, the member can choose to designate only part of those funds to provide them with a drawdown pension. The member can add to their drawdown pension at any later time by designating extra funds from their arrangement into their drawdown pension fund.
One drawdown fund per arrangement
There can be only one drawdown fund per arrangement. This will be either a:
- flexi-access drawdown fund
- drawdown pension fund providing capped drawdown pension.
A flexi-access drawdown fund is created:
- when the first designation under an arrangement is made on or after 6 April 2015, or
- a drawdown pension fund is converted to a flexi-access drawdown fund (see PTM062750).
A drawdown pension fund will be available only where the member first designated funds under the arrangement before 6 April 2015 and that fund has not been converted to flexi‑access drawdown.
As there can be only one drawdown fund under an arrangement, where there is a mix of designated and uncrystallised funds under an arrangement any further designated funds will be added to the existing drawdown fund. This means that where funds are designated on or after 6 April 2015 under an arrangement that already holds a drawdown pension fund those designated funds will be used to provide more capped drawdown pension.
As members may have more than one arrangement under a pension scheme, it is possible for a member to have both a capped drawdown fund and a flexi-access fund under the same pension scheme.
Age when a drawdown pension can start
Section 165, pension rule 1, Finance Act 2004
For a payment of drawdown pension to be an authorised member payment, the member must have reached the normal minimum pension age when the payment is made. The normal minimum pension age is currently age 55, however this will increase to age 57 from 6 April 2028. Payments of authorised pension may be made earlier than age 55 (age 57 from 6 April 2028) if a member:
- meets the ill-health condition (see PTM062100), or
- has a protected pension age which allows them to take their benefits at an age earlier than 55 (age 57 from 6 April 2028) (see PTM062200).
There is no upper age limit for starting a drawdown pension.
Types of drawdown pension: income withdrawal or short-term annuity
Paragraph 4 schedule 28 Finance Act 2004
Whether the pension is flexi-access or capped drawdown, a drawdown pension can be paid in either or both of 2 ways:
- income withdrawal
- a short-term annuity.
This is of course subject to what the pension scheme rules allow.
Income withdrawal
Paragraph 7 schedule 28 Finance Act 2004
With income withdrawal, a pension is paid to the member directly from the funds in their pension scheme.
Short-term annuity
Paragraph 6 schedule 28 Finance Act 2004
With a short-term annuity, the member uses some of their drawdown pension fund to buy an annuity contract from an insurer. This contract will pay income each year for a fixed period of up to 5 years.
The rules relating to short-term annuities depend when the annuity was purchased and the type of fund from which the annuity was purchased. For guidance on:
- short-term annuities purchased on or after 6 April 2015 from a flexi-access drawdown fund – go to PTM062720
- short-term annuities purchased before 6 April 2015, or on or after 6 April 2015 from a capped drawdown pension fund go to PTM062620.
Taxation of drawdown pension
Sections 579A to 579D and 683(3) Income Tax (Earnings and Pensions) Act 2003
The member is liable for Income Tax on any payment of drawdown pension they get in a tax year. If the drawdown pension is being paid using a short-term annuity, the taxable amount is the amount due to be paid in the tax year under the terms of the contract, even if the member doesn’t get the payment in that tax year.
The pension scheme (or the insurer paying the short-term annuity) should deduct the Income Tax due using the PAYE system before making the payment to the member.
Continuing to pay contributions once drawdown has started
Contributions can be paid into the scheme providing the drawdown pension, or into another pension scheme. However, members will need to consider the tax consequences if they wish to continue making contributions or accrue benefits. Members using flexi-access drawdown may be subject to the lower money purchase annual allowance (see PTM056510).
Transferring a drawdown pension
There are certain restriction on transferring a drawdown pension on an authorised basis. For example, a transfer of drawdown pension fund paying capped drawdown must be used to provide capped drawdown under the new scheme unless the member has asked to convert to flexi-access as part of the transfer.
PTM104000 provides guidance on the rules that apply when transferring drawdown pension.
PTM109000 provides guidance on the information that must be exchanged when a registered pension scheme transfers a drawdown pension.
Using a flexi-access drawdown or drawdown pension fund to purchase a lifetime annuity or provide a scheme pension
A member’s flexi-access drawdown fund or drawdown pension fund can provide a secured pension by:
- purchasing a lifetime annuity, or
- being used to provide a scheme pension.
Purchase of a lifetime annuity
Where the lifetime annuity is purchased from a drawdown pension fund it triggers a recalculation of the maximum amount of capped drawdown pension. See PTM062570 for more information.
Provision of a scheme pension
Where the scheme pension is provided from a drawdown pension fund it triggers a recalculation of the maximum amount of capped drawdown pension. See PTM062570 for more information.