Uncrystallised Funds Pension
Lump Sum (UFPLS)

On 6 April 2015, a host of new flexible pension rules were introduced, called UFPLS. Essentially under this rule, people can withdraw their entire pension in one go or a bit at a time.

A client can access a portion or all of their money purchase pensions savings for draw-down or buying an annuity, provided that this option is allowed under the contract.

This way, a client will be able to leave a pension invested while taking a regular income from it.

Not everyone is eligible for UFPLS. There are certain conditions that apply to UFPLS and they are listed below:

• The pension is payable from uncrystallised funds only and is not paid from drawdown funds.
• The person must be above the age of 55, or eligible for early retirement because of sickness or has a protected early retirement age.
• People under 75 years of age can access UFPLS not more than their available lifetime allowance. Any excess money withdrawn over the lifetime allowance will be considered as a lifetime allowance excess lump sum.
• If the person is of 75 years or above, he/she will have only a part of the UFPLS within their remaining lifetime allowance.

There are a few conditions outlined below that do not allow UFPLS. An individual is denied UFPLS if:

• The individual has LTA protection in the form of enhanced and/or primary protection.
• The member has protected lump sum rights which are greater than 25% or more than £375,000. The protected lump sum percentage is mentioned in the protection certificate.
• The member has a lifetime allowance factor and right before the payment of the UFPLS they are left with no lifetime allowance or are paid less than 25% of the sum.
• The funds belong to a disqualifying pension credit of a pension sharing order. It is when the pension credit comes from crystallised funds with no payable tax-free cash.
• There is an LTA enhancement factor relating to primary protection, duration of non-residence, transfers from recognised overseas pensions schemes, or pension credits before 6th April 2006.

Earlier pension laws didn’t offer people the required flexibility in retirement benefit choice in the UK. They were forced to take pension income products, instead of being able to easily access funds as lump sums.

Moreover, withdrawing uncrystallised funds as a lump sum would attract hefty tax charges as unauthorised payment tax charges. These drawbacks restricted people from saving for retirement.

In order to avoid this, the UK government introduced UFPLS on 5 April 2015. The benefit of this new rule abolished the need for the triviality lump sum for Defined Contributions schemes.

Here are some benefits of UFPLS:

• Now the members would not have to set up a new vehicle or purchase a new product.
• It allows you to take your time to make big pension decisions. In case you have not made up your mind yet on accessing your pension in the long term, using UFPLS will provide you enough time for that.
• When your pension pot is small, buying an annuity or setting up a drawdown scheme may not be the right decision. The UFPLS will allow you to access the whole pot in one lump sum or as bit by bit.

The taxation for UFPLS in two ways, which is based on the age factor. They are outlined as follows:

1. Taxation when less than 75 years

When an individual has not reached age 75, an uncrystallised funds pension lump sum is taxed as follows:

• 25% of the pension will not be subject to tax.
• 75% of the pension is taxable according to your applicable rate of income tax, exactly as a pension paid under a registered pension scheme. The payable amount will have an amount deducted under the PAYE regulations.

2. Taxation at the age of 75 years or over

When an individual reaches the age of 75, the taxation for an uncrystallised funds pension lump sum is done as follows:

• At the time of payment, if the payable amount of the uncrystallised fund pension lump sum does not exceed the person’s available lifetime allowance, taxation is done exactly as above.
• If the total pension amount exceeds the person’s available lifetime allowance at the time of payment, then the exceeded amount equivalent to 25% of the member’s available lifetime allowance at the time it is paid becomes tax-free.
• Taxation for the rest of the lump sum is done as pension income exactly as it is done under a registered pension scheme. Hence, the payable amount will have income tax deducted under the requirements of the PAYE regulations.

While UFPLS offers you the flexibility to access your pension as per your requirement, there are some downsides if it is done without proper planning.

If you withdraw too much from your pension savings too soon, you may invite risks relating to your tax situation. However, other options like an annuity can provide a guaranteed income for life.

Conversely, if your withdrawals are not sustainable, you could fall short of income in the future. As long as you do not decide to take the entire pension in one go, you choose to invest what is left.

Besides, you must be mindful about your investment decisions as their value can fall and rise. There are possible chances to get back less than what was originally invested.

It means you need professional assistance and ideal guidance to learn about the UFPLS and the investment risks. Their advice will help you review your choices regularly. You can set your withdrawal amount that suits your individual requirements.