Advisers attempting to make use of extra annual allowance offered by capped drawdown are being frustrated by providers’ “unfair” restrictions.
Rule changes mean that since 6 April there can be no new capped drawdown pots created. All new drawdown customers are put into flexi-access contracts.
However, existing capped arrangements set up before 6 April can stay in place so long as GAD withdrawal limits are not broken, with savers retaining the £40,000 annual allowance.
As a result, advisers were suggesting clients move into capped contracts ahead of pension freedom coming into force to leave open the ability to contribute up to £40,000 a year, rather than the £10,000 limit imposed on flexi-access drawdown.
But some providers are blocking new contributions to capped plans, forcing savers into flexi-access accounts if they want to add more funds.
Aegon regulatory strategy manager Kate Smith says customers in some of its older products will not be able to contribute to capped drawdown “because of the way the IT systems are set up”.
However, clients using Aegon’s newer platforms – including One Retirement and Aegon Retirement Choices – are free to make top ups.
Standard Life and Aviva will not allow savers with capped drawdown contracts to make extra contributions to pots transferred from other firms.
A Standard Life spokeswoman says: “If someone wants to make further contributions they can transfer into our flexi-access product. We would point out, however, that there are unlikely to be many people wanting to do this as most people are taking money out when in drawdown.”
Wingate Financial Planning financial planning director Alistair Cunningham says: “The decision not to allow capped drawdown to be transferred and added to is unfair.
“In a rehash of the issues a decade ago with protected tax-free cash we envisage situations where individuals are trapped in contracts that no longer meet their needs. The increased contribution flexibility of capped when compared to flexi-access makes it appealing for many.”
Other firms, such as Royal London and AJ Bell, will allow new contributions.
A Royal London spokeswoman says the decision to allow new contributions to capped drawdown, including from transferred contracts, was taken because “otherwise the customers would lose their annual allowance”.
AJ Bell technical resources manager Gareth James says: “Legislation permits additional drawdown funds to be added to an existing drawdown fund in the majority of circumstances.
“This includes adding to capped drawdown arrangements that have been transferred from another pension scheme, provided the existing drawdown funds were created post A-Day. There is a restriction if the capped drawdown was created pre A-Day.
“Systems requirements or the wording of a pension scheme’s trust deed and rules may mean that some providers do not allow further funds to be added to the capped drawdown fund, but the legislation doesn’t typically prevent this.”
Before the pension freedoms took effect, advisers and providers called for capped drawdown to be extended indefinitely.
They argued GAD limits help customers make sensible withdrawals and people should not be penalised with a restricted annual allowance for retaining funds over the long term.