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Uncrystallised funds pension lump sum (UFPLS)

Author Image The Technical Team
10 minutes read
Last updated on 6th Apr 2019

Overview

Uncrystallised funds pension lump sum (UFPLS) allows pension holders to withdraw some or all of their uncrystallised funds as a lump sum. Within the limitations of the Lifetime Allowance, 25% of the UFPLS will be paid tax free, with the balance taxed as pension income at the point of withdrawal. 

Key points

  • UFPLS are a way of taking cash lump sums from a pension without purchasing a product.
  • 25% of an UFPLS is normally tax-free and the rest is taxed at marginal rate.

  • Emergency tax will normally apply to the first payment.

  • Whether an UFPLS can be taken will depend on whether there is any lifetime allowance remaining and how old the member is.

What is an UFPLS?

From 6 April 2015, if a client wants to access some or all of their money purchase pensions savings without designating funds as available for drawdown or buying an annuity (or scheme pension), then UFPLS is one way to do this (provided that this option is allowed under the contract).

To qualify as an UFPLS:

  • it must be paid after 5 April 2015
  • it must be payable from uncrystallised rights under a money purchase arrangement
  • the client must have more lifetime allowance (LTA) remaining than the amount of lump sum being withdrawn if the client is under 75 (however, see below for further information if the client has a lifetime allowance enhancement factor)
  • if the client is over 75, they must have some standard lifetime allowance left (this is discussed below)
  • the client must have reached normal minimum pension age (currently 55), or meet the ill-health conditions, or have a protected early retirement age.

An UFPLS is not allowed:

  • where
    - the member has LTA protection in the form of enhanced and/or primary protection, and
    - they have protected lump sum rights which exceeded £375,000 (that is, over 25% of the lifetime allowance at 6 April 2006). Their protection certificate will set out the protected lump sum percentage.

  • from a disqualifying pension credit, because no tax free cash is payable (This would be the case where someone is divorced and has received a pension credit from a pension sharing order. If the pension credit comes from benefits which were already in payment at the time of the court order then the opportunity to take a PCLS has already been taken or has passed and this is known as a disqualifying pension credit)
  • if there's a lifetime allowance enhancement factor relating to primary protection, periods of non-residence, transfers from recognised overseas pensions schemes or pension credits prior to 6 April 2006. An UFPLS is still allowed up to the remaining amount of the Standard LTA however. 

Why was UFPLS introduced?

The Government wanted people to have greater flexibility in retirement benefit choice. They did not wish clients to feel forced into taking pension income products and be able to easily access funds as lump sums. This greater flexibility (removing all requirements to take regular income) may encourage more people to save for retirement.

Before 6 April 2015, taking an uncrystallised funds as a lump sum (without the appropriate designation to provide income) attracted hefty tax charges (unauthorised payment tax charges). So UFPLS brings more flexibility than was previously available. It also removes the need for the triviality lump sum which was, as a consequence, abolished from 5 April 2015 for Defined Contributions schemes (but triviality remains for Defined Benefit schemes).

An uncrystallised funds pension lump sum can be paid as an authorised member payment to a member from uncrystallised funds held in a money purchase arrangement for that member. Uncrystallised funds are funds held in respect of the member which have not, as yet, been used to provide that member with a benefit under the scheme (so have not crystallised for lifetime allowance purposes). If the money purchase arrangement is a cash balance arrangement, uncrystallised funds in the arrangement are the funds there would be in the arrangement if the member decided to draw benefits on a particular date, not the funds actually held in the cash balance arrangement at that time.

How is an UFPLS taxed?

Taking the UFPLS is a BCE 6 (just like taking a pension commencement lump sum or serious ill-health lump sum). Where the member has not reached age 75, an uncrystallised funds pension lump sum is taxed as follows:

  • 25% is paid tax-free
  • 75% is taxed as pension income in the same way as a pension paid under a registered pension scheme. This means that the payer of the lump sum will deduct and account for income tax under the requirements of the PAYE regulations

Where the member has reached age 75, an uncrystallised funds pension lump sum is taxed as follows:

  1. If the amount of the uncrystallised funds pension lump sum does not exceed the member’s available lifetime allowance at the time it is paid, it is taxed in the same way as above
  2. If the lump sum exceeds the member’s available lifetime allowance at the time the lump sum was paid then
    • that part of the lump sum equal to 25% of the member’s available lifetime allowance at the time it is paid is not liable to tax, i.e. it is paid tax-free
    • the rest of the lump sum is taxed as pension income in the same way as a pension paid under a registered pension scheme. This means that the payer of the lump sum will deduct and account for income tax under the requirements of the PAYE regulations.

Where the uncrystallised funds pension lump sum is paid after the member has reached age 75, then when calculating the amount of the member’s available lifetime allowance at the time the lump sum is paid, any lifetime allowance used up by a Benefit Crystallisation Event 5, BCE5A or BCE 5B (testing against the lifetime allowance at age 75) is not taken into account.

Example of how UFPLS is taxed

A client (age 60) has a fund of £100,000 and wishes to take the full fund as a lump sum. They'll get £25,000 tax-free, with £75,000 taxed at their marginal rate. If this is the only income they have, they will fall into higher rate tax and get £82,500 after tax*.

*Tax calculation (using 2019/2020 UK rates and allowances*)
£25,000 tax-free + £75,000 taxed
Tax (£12,500 x 0%) + (£37,500 x 20%) + (£25,000 x 40%) = £17,500
£75,000 - £17,500 = £57,500
£57,500+ £25,000 (the tax-free bit) = £82,500

If the same client decided that they only wished to withdraw sufficient to utilise their Personal Allowance they could take £16,666 UFPLS a year, they'd get £4,166 tax-free and £12,500 taxed at their marginal rate.

If they had no other income, currently their personal allowance would cover the £12,500 - so there would be no tax payable.

This produces the same result as accessing their funds using a phased strategy.

However, as soon as they start to receive State pension (or any other income that takes them over the personal allowance tax threshold), tax is payable on the sum of their income above the Personal Allowance (including the taxable element of an UFPLS).

It is however, very likely that emergency tax will be applied to the payments from UFPLS. Scheme administrators may apply emergency tax in respect of all UFPLS payments, even if a tax-code is held, as such, it is important to check the tax situation with the scheme administrator prior to drawing an UFPLS.

Using the same example as above, assuming no other income and Emergency Tax code for 2019/20 - 1250L. The client will still receive £25,000 of the UFPLS tax free, but the actual tax raised on the balance would be:

 

Band

Tax

PA

£ 12,500/12 = £1,043   

Nil

BRT

 £ 37,500/12 = £3,125 

£625

HRT

 £112,500/12 = £9,375 

£3,750.00

ART

                  £61,457

£27,656

TOTAL

                       £ 75,000

£32,031

Therefore taxpayers will find that tax of £32,031 will be deducted using the emergency method, instead of the expected £17,500. So the payment they receive would be £67,969 and not £82,500. If this method means the client has overpaid tax they can ask for this to be repaid in the same tax year. Otherwise HMRC will calculate whether they have over or underpaid tax in the following year.

*Scottish taxpayers will pay the Scottish rate of income tax (SRIT) on non-savings and non-dividend (NSND) income. NSND income includes employment income, profits from self-employment (including sole trades and partnerships), rental profits, and pension income (including the state pension). Similarly, from 6 April 2019 Welsh Taxpayers will pay the Welsh Rate of Income Tax (CRIT (C for Cymru)) on NSND income.

Other tax and deductions such as Corporation Tax, dividends, savings income and National Insurance Contributions etc. will remain based on UK rules. This could mean the amount of income tax relief which can be claimed on pension contributions by Scottish and UK tax payers may not be the same. For more info on SRIT and how this works in practice, please visit our facts page. For more info on CRIT and how this works in practice, please visit our facts page.

Can you take 25% tax-free and leave the rest unvested?

Not through UFPLS. As mentioned above, each UFPLS payment has a tax-free and a taxed element. If a client only wants to take a tax-free sum but no income or taxed sum, they’ll have to designate funds as available for flexi-access drawdown, take the 25% PCLS and no income.

There’s no PCLS payable in relation to an UFPLS. For a PCLS to exist there must be an attaching entitlement to income through drawdown or an annuity (lifetime annuity or scheme pension) - hence described as a tax-free element in an UFPLS, rather than PCLS.

Money Purchase Annual Allowance (MPAA) Trigger

If the client takes an UFPLS, they will then be subject to the money purchase annual allowance rules. For more information on these rules, please see our article on Money Purchase Annual Allowance.

Permissive Statutory Override

The ability for a scheme to pay an UFPLS is provided by the Permissive Statutory Override which allows for a scheme to pay an UFPLS even if their scheme rules would prohibit this. It is permissive in that schemes are not forced to offer the option but, if they choose to, they can do so no matter what their existing rules allow.

Clients who can't access it through their current provider may be able to transfer to another contract or provider to take advantage of UFPLS.

Age 75 and the Lifetime Allowance (LTA)

If the UFPLS is over the available LTA, the tax treatment depends on whether the member is under or over age 75 when the UFPLS is paid.

For payments under age 75, an UFPLS is allowed up to the amount of available lifetime allowance, any portion over the LTA isn’t an UFPLS. Any payment above LTA is a LTA excess (taxed at 25% or 55% dependent on whether excess is taken as an income or lump sum - it is important to remember that marginal rates would apply after the 25% LTA charge if this is nominated for income).

For payments after age 75, there must be some LTA available – there is no requirement for the whole of the UFPLS to be inside the LTA. The whole lump sum can be paid as an UFPLS: but only 25% of the available LTA will be tax-free.

Individuals with protection from before 6 April 2006 to a tax-free lump sum of more than 25% will still be able to take an UFPLS, but only 25% of this (subject to available LTA at age 75) will be tax-free. Any tax-free cash protection limit above the usual 25% would not apply in the UFPLS.

The table below compares the pre and post age 75 positions (bear in mind the starting position for the fund when over age 75 has already suffered the LTA charge deducted when the automatic benefit crystallisation event, BCE5B, took place at age 75):

 

Under 75

Over 75

Fund

£50,000

£50,000

LTA available

£40,000

£40,000

Tax

£10,000 LTA excess (taxed at 55% assuming taken as a lump sum)

£10,000 tax-free


£30,000 taxed at marginal rate

£0 LTA excess


£10,000 tax-free (being 25% of the available LTA)

£40,000 taxed at marginal rate

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