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
• If under 75, the member must have enough lifetime allowance (LTA) available to cover the full amount of the UFPLS
• If over 75, the member only needs to have some LTA left when they want to take the UFPLS (however, if the UFPLS is more than their available LTA, the tax free cash element will be limited), and
• The member must be at least age 55 or meet the ill-health conditions

Additionally, an individual can't take an UFPLS if they have:

• Primary protection or enhanced protection with registered tax free cash rights, or
• An LTA enhancement factor, but their available lump sum allowance is less than 25% (for example, from receiving a pension credit on divorce 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.

But there are a couple of exceptions where the amount of tax free cash available can be less than 25% and therefore more of the lump sum will be taxable:

• UFPLS before age 75 and amount taken is more than available LTA
  Before age 75, an UFPLS can only be paid if the member has sufficient LTA available to cover the full amount of the UFPLS.
  
  Since 6 April 2023 if the amount to be taken is more than the available LTA, the full amount over the LTA will be taxable with no tax free cash available.
  
  Before 6 April 2023 if the amount to be taken was more than the available LTA, the amount over the LTA was paid as an LTA excess lump sum taxed at 55%, with no tax free cash.
• UFPLS after reaching age 75 and amount taken is more than available LTA
  An UFPLS can be paid from funds exceeding the LTA, but the tax free cash amount may be less than 25%.
  
  To take UFPLS post 75 the member must have some LTA left. When working out the remaining LTA, to calculate the available tax free cash, the amount of LTA used up at 75 by the unused funds is ignored. This will result in an UFPLS with tax free cash of less than 25%, because the tax free cash is limited to 25% of the remaining LTA.

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 of time, 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 2023/24 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 has to provide a statement to the member within 31 days.

The member then has to 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)