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

Updated 29 October 2020

5min read

Nick Green
Financial Journalist

Uncrystallized funds pension lump sum

An uncrystallised funds pension lump sum (UFPLS) is one way to access a defined contribution pension pot. When you reach pension freedom age (currently 55, but 57 from 2027), you have a number of different options for drawing your pension pot. A UFPLS is one of the simplest ways – but usually not the best. Here you can find out more about what this means, and the pros and cons of taking a pension this way.

The uncrystallised funds pension lump sum explained

A UFPLS is a withdrawal of funds directly from the pension pot into which you have been saving up. It’s possible to do this at any point once you reach pension freedom age, provided you haven’t already accessed the pot in any other way, such as setting up a drawdown scheme, buying an annuity, or taking a tax-free lump sum of 25% of the pot.

Because you won’t have already taken a 25% tax-free lump sum, when you take a UFPLS, 25% of the money is tax-free. The remaining 75% is taxed as ordinary income, depending on the rate of income tax you’re paying at the time (your ‘marginal rate’).

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’s no need to set up a new vehicle or buy a new product.
  • It lets your delay big pension decisions – if you haven’t yet made up your mind 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 have been designed for saving up, not withdrawing money. They therefore won’t be ideal for taking an income in the long term.
  • UFPLS is less flexible than drawdown – there is usually a minimum amount you can withdraw in one go. This can cause your fund to deplete faster, and may mean you miss out on growth too.
  • A related issue is that 75% of each lump sum is taxable, so if you are forced to withdraw more than you really need, you may also pay more tax than necessary.
  • You can’t take the big 25% tax-free lump sum that you can when using other options.

UFPLS also shares the same main disadvantages of drawdown, which are that your pot is still exposed to the stock market and can rise and fall, and that your money can eventually run out. An annuity, on the other hand, 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 expect initially. This happens because you may be on an emergency tax code and HMRC will assume you’ll be getting the same sum each month for the rest of the tax period. You might then have to reclaim your overpayment, but it should be automatically repaid at a later date, once you’ve been issued with a tax code.

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

Bear in mind that you are taxed on all your income, not just the pension withdrawal. So any state pension you receive (and any other income, e.g. from work or rent) will go towards your total income for that year. You’ll then pay income tax on everything above your personal allowance, just as a wage-earner would.

What’s the difference between UFPLS and drawdown?

UFPLS may be seen as cruder and 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 to some extent from market fluctuations while making it last as long as possible.

With UFPLS, however, your pot stays invested in the same place where it was built up. This is often less than ideal, since this fund will be designed to deliver long-term growth while you are paying into it, and won’t be optimised for withdrawals.

Thirdly, a drawdown fund will often be actively managed over time by your financial adviser, but with UFPLS you will usually be on your own.

Which is best: UFPLS or drawdown?

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 are deciding what to do, but using UFPLS in the long term is really just a sign that you haven’t thought about your pension income properly – and you really ought to.

You may however find it useful to use UFPLS to take smaller pension pots out in one go – just beware of the tax implications.

What is the difference between crystallised and uncrystallised funds?

‘Crystallised’ and ‘uncrystallised’ are technical terms you don’t really need to know about, but 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 lifetime pension allowance – ask your adviser about this.

Does UFPLS trigger MPAA?

Your 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 keep paying into your pension after you’ve started to draw your pension – it may sound odd, but you might do it if your income is unpredictable, or if you needed to access your pension for any reason while continuing to earn.

The problem is that accessing your pension in any way – including UFPLS – will move your from the annual allowance to your MPAA. Your standard annual allowance is £40,000 a year, but your MPAA is just £4,000 a year. This is mainly to stop people ‘churning’ their pension and getting tax relief on it over and over again.

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, but because there is most likely a better option for you.

In general, 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, because you risk wasting money unnecessarily by postponing these decisions.

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About the author
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.