What is an Uncrystallised Funds Pension Lump Sum (UFPLS)?

An uncrystallised funds pension lump sum (UFPLS) is one way to access a defined contribution pension pot.

When you reach 55 (rising to 57 from 6 April 2028), you have a number of different options for drawing your pension pot.

A UFPLS is one of the simplest ways to draw your pension, but it is usually not the best option.

The uncrystallised funds pension lump sum explained

A UFPLS is a direct withdrawal of funds from your pension pot.

You can do this at any point after reaching your minimum pension age, as long as you haven't accessed your pot in other ways, such as setting up a drawdown scheme, buying an annuity, or taking a 25% tax-free lump sum.

Since you haven't already taken a 25% tax-free lump sum, 25% of a UFPLS is tax-free. The remaining 75% is taxed as ordinary income based on your current income tax rate.

What are the conditions for a UFPLS?

To qualify for a UFPLS, you must be over the age of 55 (rising to 57 in 2028) or eligible for early retirement due to ill health.

You will also qualify if you have a protected pension age as part of your pension scheme.

Other conditions that need to be met include:

• Individuals aged under 75 can only have a UFPLS if they have some unused lump sum allowance (LSA) and lump sum and death benefit allowance (LSDBA).

• Individuals aged 75 and over can have a UFPLS when only part of the uncrystallised funds pension lump sum is within the LSA and LSDBA allowances.. It is important to note that UFPLS is only available from uncrystallised funds and can't be paid from drawdown funds, for example, as they are crystallised funds.

What are the advantages and disadvantages of UFPLS?

There are both advantages and disadvantages of UFPLS.

What are the advantages of UFPLS?

People who choose to take UFPLS usually do so for one or more of the following reasons:

• It’s simple: There is no need to set up a new product or buy a new one.

• It lets you delay big pension decisions: If you haven’t yet made up your mind about how to access your pension in the long term, you can use UFPLS in the meantime.

• If this particular pension pot is small, it may not be worth buying an annuity or setting up a drawdown scheme. You can, therefore, use UFPLS to access the whole pot in one lump sum or as a series of lump sums.

What are the disadvantages of UFPLS?

There are, however, significant disadvantages to using UFPLS as a long-term way to access your pension.

Here are the main downsides:

• Your pension fund’s investments are designed for saving, not withdrawing money. Therefore, UFPLS is not ideal for providing a long-term income.

• There is a risk that you might withdraw too much in one go, leaving you without enough savings for later in life and meaning you miss out on potential growth.

• 75% of each lump sum is taxable, so if you withdraw more than you really need, you may also pay more tax than necessary.

• You can’t take the 25% tax-free lump sum available with other options when using UFPLS.

UFPLS also shares the main disadvantages of drawdown: your pot is still exposed to stock market fluctuations and you risk eventually running out of money. On the other hand, an annuity provides a guaranteed income for life.

How is UFPLS taxed?

As mentioned above, 25% of each UFPLS is tax free, and the remaining 75% is taxed at your marginal rate.

One thing to bear in mind is that HMRC could charge you more tax than you initially expect.

This can happen because you may be on an emergency tax code, so HMRC will assume you’ll be receiving the same sum each month for the rest of the tax period.

You might then have to reclaim any overpaid tax, but it should be automatically refunded at a later date once you’ve been issued with a tax code.

Learn more: What is emergency tax and can I claim it back?

Here’s a simple example of how taxation works on a UFPLS:

• Your pension pot has a value of £100,000, which you have not accessed in any way

• You decide to withdraw a one-off lump sum of £10,000

• £2,500 of this sum is tax-free, with the remaining £7,500 being subject to income tax

• There is £90,000 left in your pension pot, which remains invested

Remember that you are taxed on all your income, not just the pension withdrawal.

So, any state pension you receive (along with any other income) will go towards your total income for that year.

You’ll then pay income tax on everything above your personal allowance.

What’s the difference between UFPLS and drawdown?

UFPLS may be seen as a simpler form of drawdown. It has similar disadvantages to drawdown, but only some of the advantages.

The first key difference relates to the tax-free money from your pension.

Everyone is entitled to 25% of their pension pot tax free. With UFPLS, you receive this bit by bit, with every withdrawal being 25% tax free.

However, with drawdown, you will access a 25% lump sum separately.

Another important difference is how your pot is invested.

With drawdown, your pot will be reinvested in funds designed to provide a combination of stability and growth as you make regular withdrawals. This aims to protect your pot from market fluctuations to some extent and help it last as long as possible.

However, with UFPLS, your pot may stay invested the same way it was accumulated unless you move it.

This is often less than ideal since this fund is designed to deliver long-term growth while you are paying into it, meaning it won’t be optimised for withdrawals.

If you do decide to go with UFPLS, a financial adviser can help you structure the underlying assets to support regular withdrawals or move the pot to another provider that offers this flexibility.

UFPLS vs drawdown: which is better?

The short answer is that drawdown is usually a better option than UFPLS, at least in the long term.

UFPLS can be a useful stop-gap source of income while you decide on a long-term strategy., However, using UFPLS in the long term is a sign that you haven’t thought about your pension income properly – and you really ought to.

You may find UFPLS useful for withdrawing smaller pension pots in one go, but be aware of the tax implications.

What is the difference between crystallised and uncrystallised funds?

‘Crystallised’ and ‘uncrystallised’ are technical terms.

Put simply: your pension becomes crystallised when you decide to take a tax-free lump sum from it, buy an annuity, or set up a drawdown scheme.

A UFPLS is when you take money from a pension pot that hasn’t previously been accessed in any of these ways.

Crystallising your funds can have an impact on your pension allowances – ask an adviser about this.

Does UFPLS trigger the money purchase allowance (MPAA)?

The MPAA is your ‘money purchase annual allowance'. Everyone has a pension annual allowance, which is simply the amount you can pay into your pension pot each year and still get tax relief.

It’s possible to continue contributing to your pension after you have started to draw from it. This might be useful if your income is unpredictable or if you need to access your pension for any reason while still earning.

However, accessing your pension in any way, including through UFPLS, will switch you from the standard annual allowance to the MPAA.

Your standard annual allowance is £60,000 a year, but your MPAA is £10,000 a year. MPAA triggers are mainly there to stop people ‘churning’ their pension and getting tax relief on them repeatedly.

Do I need a financial adviser to take a UFPLS?

You don’t need advice to take a UFPLS. In fact, if you do take advice, then the adviser will probably recommend a different option.

This isn’t because UFPLS is necessarily bad. Instead, it is because there is most likely a better option for you.

It’s strongly recommended that you see a financial adviser as you approach retirement so you can figure out the best way to access your pension.

Don’t leave it until you’ve already retired as you risk wasting money unnecessarily by postponing these decisions.

Get expert financial advice

UFPLS offers a straightforward way to access your pension pot, providing flexibility and immediate access. However, it is often more suitable as a temporary solution rather than a long-term strategy due to its limitations and potential tax implications.

If you are considering UFPLS, it's crucial to weigh its simplicity against the advantages of alternative options like drawdown or annuities.

Let Unbiased match you with a financial adviser for expert financial advice to help you make informed decisions that align with your long-term retirement goals and financial needs.