Drewberry™ provide pensions, investment and insurance advice for Money to the Masses readers throughout the UK.

Uncrystallised Fund Pension Lump Sum (UFPLS) Explained

What Is an Uncrystallised Funds Pension Lump Sum?

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 reffered to as a ‘FLUMP’.

Uncrystallised funds pension lump sums are very 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However, a UFPLS is withdrawn directly from your pension rather than via a drawdown fund.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.

Need Pension Advice?
Call us on 02084327333
First Name
Phone
Email
 

Uncrystallised Funds Pension Lump Sums Explained

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However, unlike drawdown, where you have to designate funds from your pension pot into a drawdown fund, a UFPLS can be withdrawn straight from your pension pot.

Explaining UFPLS

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suggests, taking a UFPLS doesn’t ‘crystallise’ your whole pension – it only crystallises the portion of the pot you’ve withdrawn via UFPLS.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 (i.e. turned into income).

 

How Are Uncrystallised Funds Pension Lump Sums Taxed?

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.

taxation of UFPLS

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’re not overpaying.

Can I use UFPLS to take just tax-free cash from my pension?

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 mandatory 25% tax-free/75% taxable split.

uncrystallised funds pension lump sums and the lifetime allowance

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.

UFPLS and the lifetime allowance

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:

  • 55% if you take the excess as a lump sum
  • 25% if you take the excess as an income (plus the income tax due on the sum).

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.

Need Help? Start Live Chat with our Experts  

Neil
Pensions Advice

Robert
Income Protection
 

How Do Uncrystallised Funds Pension Lumps Sums Work?

Opting to take a UFPLS from your pension pot allows you to withdraw cash from your pension as if it were a bank account. 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.

If you just take the 25% tax-free cash using pension drawdown and leave the rest invested, that doesn’t trigger the MPAA until you touch the remaining 75% of your pot.

Casey Goodwin
Pensions & Wealth Administrator

 

Flexi-Access Drawdown vs UFPLS

Income Drawdown

  • Lets you withdraw your tax-free pension cash as one lump sum
  • 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
  • You don’t have to move your entire pot to pension drawdown at once
  • 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
  • The MPAA only kicks in once you take an income, not after just taking the tax-free cash.

UFPLS

  • 25% of each withdrawal contains a tax-free element
  • Leaves your pension pot invested so there’s the potential for investment growth in retirement
  • Lets you withdraw lump sums of varying sizes as required
  • You don’t have to take your entire pension as one single UFPLS
  • Usually 25% of the lump sum will be tax-free with the remaining 75% being taxable
  • 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.

Neil Adams
Pensions & Investments Expert at Drewberry

Download our latest FREE e-Guides

The Drewberry 'Making Sense' guides are here to cut through the jargon so you can understand how to make the most of your wealth.

Download our series of guides for help making the right decisions for your financial future.

 

Can I Take a UFPLS From My Pension?

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 must be at least 55 (unless you qualify for an ill health pension or your scheme has a protected retirement age)
  • The payment must not be a pension commencement lump sum (PCLS), which is a tax-free payment you may be entitled to take when you start drawing your pension
  • The payment must not be a trivial commutation lump sum, whereby you’re entitled to take up to three small defined contribution pension pots of £10,000 as lump sums
  • If you’re under 75, the lump sum you’re withdrawing must not exceed your available pension lifetime allowance or you’ll face either a 55% or 25% lifetime allowance charge on the excess, depending on if you take it as a lump sum (the former) or income (the latter)
  • If you’re over 75, you must have some of your lifetime allowance available, with the tax-free element you can receive being 25% of your available LTA and the remainder being taxed as income.
 

Who can’t take a UFPLS from their pension?

You can’t take an uncrystallised funds pension lump sum if:

  • The pension assets you’re seeking to draw the UFPLS from represent to any extent a disqualifying pension credit (which arises in the case of divorce, where an ex-spouse/ex-civil partner received a share of your pension in a divorce after your pension had been crystallised (i.e. was already in payment)
  • If you’ve applied for pension lifetime allowance protection and have enhanced protection, with or without primary protection, and also have protection for lump sum rights in excess of £375,000 as of April 5th 2006
  • If you have no lifetime allowance available, or if your available lifetime allowance is less than 25% of the sum being paid.
Start your journey today...
  Find out how a Drewberry financial adviser can help you reach your destination by making the most of your finances.
Call us on 
Pros and cons of uncrystallised funds pension lump sums

Advantages and Disadvantages of UFPLS

There could be a number of benefits to taking your pension via uncrystallised funds pension lump sums, especially if:

  • You’re looking to take a varying amount of money out of your pension each time
  • You don’t want/need your 25% tax-free cash upfront and would prefer to spread it over time
  • You don’t want/need a regular pension income.

On the other hand, some of the drawbacks of taking uncrystallised funds pension lump sums include:

  • You can’t just take your tax-free cash – it’s got to come with a taxable element
  • It’s not as widely available as income drawdown or annuities
  • There tends to be more administration involved with every UFPLS you take, which means it’s not a particularly attractive option for those wanting to take a regular monthly income
  • Funds in a pension or income drawdown are held outside your estate for inheritance tax purposes; funds withdrawn from your pension via a UFPLS and held in a bank account, for instance, could be subject to inheritance tax
  • Taking a UFPLS immediately triggers the reduced money purchase annual allowance; for pension drawdown, this isn’t triggered by simply taking your tax-free cash entitlement, only when you take an income
  • As with income drawdown, you could run out of cash if your investments underperform or the lump sums you take are too large.
Expert advice on uncrystallised funds pension lump sums

Should I take a UFPLS? Expert Pension Advice

There are a number of pros and cons to using uncrystallised funds pension lump sums to fund your retirement. You’ll have to weigh up not just the advantages of disadvantages of a UFPLS retirement approach, but also how it will stack up in comparison to your other options – most notably income drawdown.

It’s worth remembering that you can’t opt to take a UFPLS once you’ve moved your whole pension pot to drawdown because your fund will have crystallised, but you can move your pot to drawdown after initially taking a UFPLS.

It’s always best to consult a pensions expert when it comes to deciding how to provide a retirement income – something the team at Drewberry is here to help with. Just pop us a call on 02084327333 for expert pension help and advice.

Neil Adams
Pensions & Investments Expert at Drewberry

Need Pension Advice?
Call us on 02084327333
First Name
Phone
Email

Frequently Asked Pensions Advice Questions

 
My husband and I have some other sources of income but fairly modest pension savings – is it worth...
 
Could you help me understand the difference between a defined benefit and a defined contribution pension...
 
I’m a 50-year-old woman. There seem to have been so many changes to the state pension age recently...
 
I understand that any pensions I accumulate will provide me with an monthly income once I’ve retired,...
REVIEWS
EXCELLENT
4.92 / 5 Average
1,263 Reviews
Anonymous
Overall Rating
SAM Carr was exceptional, he made my life very easy by explaining all the details very clearly whilst giving me the best advice possible for myself.

Would recommend to a friend!
Anonymous
Overall Rating
Provided the advice & guidance that I needed
M
Overall Rating
The overall experience which I have had can be summarized by Professional, Swift and friendly. I would recommend the service to others.
D
Overall Rating
Extremely helpful and rapid service at short notice.
A
Overall Rating
Very clear explanations of the options and then efficiently processed the transaction