UFPLS example
Jeff has Fixed Protection 2016 which means he has an LTA limit of £1.25m until protection is lost or the standard LTA increases above this amount. We'll assume the standard LTA limit does not increase above £1.25m for the purposes of this example.
In June 2016, Jeff crystallised benefits valued at £750,000 by taking TFC of £187,500 and designating £562,500 to drawdown. This used up £750,000/£1,250,000 x 100% = 60% of his lifetime allowance.
At age 74, Jeff decides to take an UFPLS payment of £100,000 from his uncrystallised fund. As he has sufficient LTA he can receive 25% of this tax-free and the remaining 75% is taxed as pension income via PAYE. This uses up a further £100,000/£1,250,000 x 100% = 8% of his LTA.
At age 75, Jeff's remaining uncrystallised fund of £250,000 is tested against his LTA through BCE 5B and uses £250,000/£1,250,000 x 100% = 20%. His previously crystallised drawdown fund is now valued at £687,500 and is tested through BCE 5A, however only the growth over the amount originally designated to drawdown is tested, so this uses £687,500 - £562,500 = £125,000/£1,250,000 x 100% = 10%.
At age 76, Jeff decides to take another UFPLS payment of £200,000 from his unused funds which are now valued at £275,000. To work out how much LTA he has available we ignore the amount used under BCE 5B but not the amount used under BCE 5A which gives a total LTA used of 78% meaning he has 22%, i.e. £275,000 remaining and the full £200,000 can be paid as an UFPLS with 25% tax-free. The scheme administrator then lets Jeff know that he has used a further 16% of his LTA (£200,000/£1,250,000 x 100% = 16%).
At age 80 Jeff decides to take his full remaining unused fund, valued at £90,000, as an UFPLS payment. Jeff has now used up 94% of his LTA and therefore has 6%, i.e. £75,000 remaining so his UFPLS payment would be made as follows:
25% of £75,000 = £18,750 is paid tax-free
The remaining £71,250 is taxed as pension income via PAYE
If Jeff had not reached age 75 before settling this payment, it would have been treated differently. If he asked to take the full £90,000 as a lump sum then the amount in excess of the available LTA would have been taxed as an LTA excess at 55%, as follows:
25% of £75,000 = £18,750 paid tax-free
The remainder of available LTA £56,250 taxed as pension income via PAYE
And £15,000 LTA excess taxed at 55% (alternatively this fund may be designated to drawdown or used to buy an annuity which would make it subject to a 25% charge instead, plus PAYE when income was paid from the arrangement).