Techzone

What is an UFPLS?

Uncrystallised funds pension lump sums (UFPLS) are a way of taking pension benefits from money purchase pensions without going into drawdown or buying a lifetime annuity.

Under the UFPLS option, an individual can take their uncrystallised pension funds in one go, or as a series of lump sums.

It's also possible to combine UFPLS with other benefit options - for example, taking an UFPLS from part of the fund and using the remainder to buy a lifetime annuity to provide a guaranteed income.

The conditions to allow an UFPLS

Several conditions must be met before an UFPLS can be paid:

• As the name suggests, the UFPLS must be payable from uncrystallised rights held under a money purchase arrangement
• The member must be at least age 55 or meet the ill-health conditions

Additionally, an individual cannot take an UFPLS if they have:

• Primary protection or enhanced protection with registered tax-free cash rights, or
• the funds include disqualifying pension credit rights - i.e. where, on divorce, the individual received a pension credit from a pension already in payment

Unlike flexi-access drawdown, anyone with scheme specific lump sum protection (allowing tax-free cash of more than 25% of the fund) cannot take an UFPLS from that scheme - unless they give up their right to the higher tax-free cash.

Availability of UFPLS

Legislation now allows all money purchase schemes to offer UFPLS - even where the scheme rules don't permit it. However, there's no obligation for every scheme or provider to offer it.

For example, some pension schemes may not have systems in place to facilitate UFPLS. And schemes which offer flexi-access drawdown, which is more flexible than UFPLS, may have no need to offer UFPLS as well.

Some individuals may need to transfer their pension to access UFPLS or flexi-access drawdown. Of course, anyone doing this should first check that there are no disadvantages to making the transfer that outweigh the benefits - for example, the possible loss of protected tax-free cash if the transfer isn't part of a block transfer. Care should also be taken if transferring whilst in poor health as this could have IHT implications if the member dies within two years of the transfer.

Taxation of an UFPLS

Normally, 25% of the lump sum is tax free with the balance subject to income tax at the recipient's marginal rate.

However, the tax-free element of any UFPLS payment has to be tested against the individual’s available ‘lump sum allowance’ (LSA). The LSA is a limit on the overall amount of tax-free cash that an individual can take from their pensions.

The standard LSA is £268,275 (25% of the former LTA). Those with transitional protections can have a higher LSA.

If the remaining LSA is less than 25% of the intended UFPLS payment, it can still be paid, but the tax-free element will be reduced accordingly, with the balance subject to income tax. This means that an UFPLS can be paid, even where the individual has no LSA left.

The rules for UFPLS are now the same for payment before or after reaching age 75.

The tax-free element of any UFPLS payment also counts towards the individual’s ‘lump sum and death benefit allowance’ (LSDBA). The LSDBA is a combined allowance for both lifetime tax-free lump sums and tax-free lump sum death benefits. The standard LSDBA is £1,073,100 but those with transitional protections can have a higher allowance.

Drawing pension funds tax efficiently

Pension flexibility brings temptation. There's a danger that some pension savers will use UFPLS to draw all their pension savings at the first opportunity. This could see them hit with a large income tax bill - much larger than the bill for only taking what they need, when they need it.

Taking pension benefits in stages, over a longer period, can result in the individual paying significantly less in tax.

Emergency tax code

UFPLS will normally be taxed using an emergency tax code on a month one basis. For the 2024/25 tax year, this means a tax-free amount of £1,047.50 (£12,570/12) then 1/12th of each of the applicable tax bands (up to additional rate tax).

This normally results in an initial overpayment of tax which can come as a surprise to individuals - particularly if they need a certain amount for a particular purpose.

However, any overpayment of tax can be reclaimed.

Triggering the money purchase annual allowance (MPAA)

When someone first flexibly accesses pension benefits, this reduces the amount that can be paid into money purchase pension schemes to £10,000 per tax year - this is the MPAA. It's also no longer possible to carry forward any unused annual allowance from earlier years into a money purchase scheme.

Taking an UFPLS is one of the ways to flexibly access benefits, so it triggers the MPAA.

Information requirements

When someone first takes an UFPLS (or otherwise flexibly accesses their pension, such as taking income under flexi-access drawdown), the scheme administrator must provide a statement to the member within 31 days.

The member then must notify any other money purchase or hybrid schemes that they're an active member of within 91 days of receiving their statement, so that they're also aware that the MPAA applies.

Useful information:

• Annual allowance (includes the money purchase annual allowance)
• Using drawdown tax efficiently (includes emergency tax on pension income)