UK pensions: Designating for drawdown - HMRC rules tightened

On 26 March 2025, HMRC updated the Pensions Tax Manual (PTM) in relation to designating funds for drawdown.

As amended, PTM makes clear that for an effective designation to be made, the scheme must be capable of making a drawdown payment to the member (whether or not it actually does so). This means that designating funds for drawdown in order to take a pension commencement lump sum (PCLS) (“tax free cash”) will only be possible if the member can then access income drawdown from the scheme.

HMRC notes that, provided there is the possibility of income drawdown, it is up to schemes to determine their own processes for documenting a member’s designation for drawdown.

A possible work around?

HMRC comments that a scheme could require members who designate funds for drawdown to take all their designated drawdown funds in a single instalment. In other words, it would comply with HMRC’s requirements if a scheme’s rules allow for a single drawdown payment of all a member’s designated funds, without providing for ongoing partial withdrawals.

Many trustees of occupational defined contribution (DC) schemes have not wanted to take on the additional investment responsibilities and administration involved with providing ongoing income withdrawals. However, offering a single drawdown payment of all designated funds may be less burdensome and more acceptable to trustees.

Our understanding is that a member who designates funds for drawdown and takes the associated PCLS could choose not to take an immediate drawdown payment, if the scheme rules so allow.

There are various reasons why a member who designates funds for drawdown and takes a PCLS may prefer not to take an immediate drawdown payment, including:

• Drawdown payments are subject to income tax at the member’s marginal rate;
• Taking a drawdown payment will trigger the money purchase annual allowance, meaning that the member could then contribute only up to £10,000 a year tax free to a DC arrangement;
• Funds designated for drawdown but not yet taken remain in the tax-privileged pension ecosystem; and
• Designated drawdown funds may subsequently be used to buy an annuity or transferred to another pension arrangement which allows partial drawdown.

Action needed

Those responsible for schemes which allow designation for drawdown but which do not provide income drawdown should consider promptly whether their rules need amendment in light of HMRC’s new approach.