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Bev Stoves & Sarah McCarthy, Independent Financial Advisers, Investment Sense

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This is a new option introduced in April 2015 following the implementation of Pension Freedom.

Uncrystallised Funds Pension Lump Sum, or UFPLS for short, allows you to withdraw a single or series of lump sums from your existing pension without the need to move the funds into a Flexi Access Drawdown plan first.

25% of each payment under UFPLS may be taken tax free with the balance taxed at your marginal rate of income tax.

Some pension providers may not offer UFPLS as an option. In these circumstances it is therefore necessary to transfer to an alternative arrangement unless you wish to withdraw the entire fund.

In order to take advantage of UFPLS there are a number of sometimes complex conditions which need to be met:

  • You must be aged 55 or over or, if younger, meet ill-health conditions
  • The payments come from a money purchase plan, such as a Personal Pension, Stakeholder or SIPP, which is uncrystallised, that is to say income and / or lump sums have not already been taken from it
  • If you are aged under 75, you must have more Lifetime Allowance remaining than the lump sum required
  • If aged over 75, you must have some Lifetime Allowance remaining

There are also a number of circumstances where UFPLS is unavailable:

  • If you have Enhanced and/or Primary Protection together with registered tax free cash of more than £375,000, immediately before the lump sum is paid
  • If the UFPLS would be coming from a pension that contains a disqualifying pension credit such as a pension credit on divorce that originates from previously crystallised funds
  • If you have a Lifetime Allowance enhancement factor on your pension benefits and the available lump sum would be less than 25% of the proposed amount of the UFPLS

Advantages of UFPLS

  • It should allow you simple and easy access to your money held within your pension fund
  • It is an ideal option for people with small pension funds who simply want to have their entire pension pot paid out in one lump sum
  • Money not withdrawn will continue to be invested in a tax-efficient environment

Disadvantages of UFPLS

  • Although UFPLS was introduced by the Government, pension providers are not being forced to offer it as an option. If your provider doesn’t offer UFPLS you may have to move your pension pot elsewhere
  • Tax will be payable on 75% of the amount withdrawn, although it may be possible to reduce this amount if payments are staggered over different tax years
  • This option, which the Government billed as treating your pension like a bank account, may increase the temptation to keep ‘dipping into your pension pot, which could leave you unable to meet your expenditure in years to come. Providers are likely to impose a minimum amount that has to be withdrawn each time you access your funds
  • It is likely that some people who withdraw cash from their pensions early in the financial year may be taxed too highly by HM Revenue & Customs (HMRC). For example, if you receive a payment in April, HMRC will treat it as if it expects you to get the same amount every month for the rest of the tax year. If you only plan to make one withdrawal in the year, this could mean you pay too much tax and have to claim it back or wait for it to be automatically repaid
  • The remainder of your pension fund not taken as income and / or a lump sum will be subject to future investment returns, which are unknown and the value of funds will fluctuate over time

Where next?

Pensions Freedom – A summary of the key changes
Pensions Freedom – Key questions answered
Key considerations
Retirement options
Delay taking your pension
Annuity
Investment Linked Annuity
Fixed Term Annuity
Flexi-Access Drawdown
Uncrystallised Funds Pension Lump Sum (UFPLS)
Purchased Life Annuities
8 Steps to take leading up to retirement