What Is An Uncrystallised Funds Pension Lump Sum?

Your Financial Plan
28/03/2023
10 mins

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However, a UFPLS is withdrawn directly from your pension rather than via a drawdown fund.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 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where you have to designate funds from your pension pot into a drawdown fund before accessing them, a UFPLS can be withdrawn straight from your pension pot.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suggests, taking a UFPLS doesn’t ‘crystallise’ your whole pension – it only crystallises the portion of the pot you’ve withdrawn via UFPLS.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.

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.

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.

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 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.

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.

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How Uncrystallised Funds Pension Lumps Sums Work

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.

The Difference Between Pension Drawdown and UFPLS

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.

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.

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.

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