IMPORTANT NOTICE 🧐
As of the Spring budget 2023, the UK chancellor announced the abolition of the pension lifetime allowance (LTA). This came into effect from 6 April 2023.
It’s important to note however, the Labour party has announced that if they were to be elected, the allowance may be reintroduced in the future. If this occurs, we will update our records to reflect any changes. The information on this page is based on the LTA pre 6 April 2023.
Pension drawdown has received most of the attention when it comes to retirement flexibility, but there’s an alternative to income drawdown known as taking uncrystallised funds pension lump sums (UFPLS). Even in acronym form UFPLS is a bit of a mouthful, so a UFPLS is sometimes referred to as a ‘FLUMP’.
Uncrystallised funds pension lump sums are similar to income drawdown in that they offer a flexible way to take your defined contribution pension.
However, a UFPLS is withdrawn directly from your pension rather than via a drawdown fund. UFPLS withdrawals have a number of advantages – just taking pension cash as and when you need it often seems like an attractive option. Still, there are a number of drawbacks to consider as well and there are restrictions on UFPLS availability depending on your circumstances.
Uncrystallised funds pension lump sums and income drawdown are similar in that they offer flexible access to your pension. However, unlike drawdown, where you have to designate funds from your pension pot into a drawdown fund before accessing them, a UFPLS can be withdrawn straight from your pension pot.
As the name suggests, taking a UFPLS doesn’t ‘crystallise’ your whole pension – it only crystallises the portion of the pot you’ve withdrawn via UFPLS.
Even after you withdraw a UFPLS the remainder your pension pot will remain uncrystallised.
You can only take uncrystallised funds pension lump sums out of funds you haven’t already crystallised.
Generally speaking, when you take a UFPLS the first 25% is tax-free and the remaining 75% is taxed at your highest marginal rate.
So if an individual has a £100,000 pension pot and they want to withdraw £40,000, £10,000 (25%) would be tax-free and the remaining £30,000 would be subject to income tax at their highest marginal rate.
When you first take a UFPLS, it’s likely your pension provider will apply an emergency tax code to the withdrawal. This will also apply to all future withdrawals until HMRC sends the correct tax code your pension provider, which could lead to you paying more tax than is due. It’s important to actively manage the tax on UFPLS to ensure you don’t overpay.
No. You can’t use an uncrystallised funds pension lump sum to take the tax-free cash and not take a taxable element with it. Every tax-free element you withdraw with a UFPLS comes with a mandatory taxable element worth three times the tax-free element to preserve the required 25% tax-free / 75% taxable split.
In most cases, if you want to just take your tax-free cash then pension drawdown is better than uncrystallised funds pension lump sums for your specific needs.
You must have at least some of your pension lifetime allowance available to take a UFPLS.
If your chosen UFPLS causes you to exceed your lifetime allowance, you’ll have to pay the lifetime allowance charge on the excess if you’re under 75. This will be at either:
If you’re over 75 and your UFPLS exceeds your lifetime allowance, the tax-free element of your UFPLS is limited to 25% of your available lifetime allowance, with the remainder being taxed as income at your marginal rate.
You’re automatically assessed for the lifetime allowance on your 75th birthday and so will already have paid the lifetime allowance charge, which means there’s no additional lifetime allowance charge to pay in this scenario.
You can take an uncrystallised funds pension lump sum of any size from your pension pot whenever you need to.
Other than the obvious restriction of the size of your pension pot, you’ll also need to consider your pension lifetime allowance. You must have at least some lifetime allowance available to make a UFPLS withdrawal and the 25% tax-free element can’t exceed your available lifetime allowance.
Don’t forget that using a UFPLS automatically triggers the money purchase annual allowance (MPAA), meaning you can pay in a lower amount into your pension each year after taking benefits.
Flexi-Access Drawdown | UFPLS |
|---|---|
Lets you withdraw your tax-free pension cash as one lump sum | 25% of each withdrawal contains a tax-free element |
Leaves your pension pot invested so there’s the potential for investment growth in retirement | Leaves your pension pot invested so there’s the potential for investment growth in retirement |
Lets you withdraw lump sum / income payments of varying sizes | Lets you withdraw lump sums of varying sizes as required |
You don’t have to move your entire pot to pension drawdown at once | You don’t have to take your entire pension as one single UFPLS |
You can withdraw up to 25% of your pension (subject to your lifetime allowance) tax-free and use the rest to provide a taxable income | Usually 25% of the lump sum will be tax-free with the remaining 75% being taxable |
The MPAA only kicks in once you take an income, not after just taking the tax-free cash. | The MPAA is triggered as soon as you take your first UFPLS |
Although taking your pension via a series of uncrystallised funds pension lump sums is slightly different from income drawdown, the same danger applies when it comes to your fund running out too soon.
This could happen if you withdraw too much or your pension investments underperform.
You can only take a UFPLS if you’re in a defined contribution pension – it’s not available for final salary schemes. Other conditions include:
You can’t take an uncrystallised funds pension lump sum if:
There could be a number of benefits to taking your pension via uncrystallised funds pension lump sums, especially if:
On the other hand, some of the drawbacks of taking uncrystallised funds pension lump sums include:
A good financial plan can help you make the right decisions when it comes to your finances. Make the right decisions today to build a more prosperous future.
Good financial planning with clear goals can increase your retirement income by as much as 53%. Old Mutual Redefining Retirement Survey
We started Drewberry because we were tired of being treated like a number and not getting the service we all deserve when it comes to things as important as planning our finances. Below are just a few reasons why it makes sense to let us help.