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UFPLS is a flexible way to take cash from your pension, as and when you need it. It lets you take withdrawals when you want, without committing to regular income.
UFPLS isn’t for everyone, and we recommend taking professional financial advice when considering it. But in this guide we’ll look at some of the potential benefits, including for tax planning and the possibility of further growth of your pension savings.
What is UFPLS?
An Uncrystallised Funds Pension Lump Sum (UFPLS) is a way to access money from your defined contribution pension (also known as a money purchase pension). It allows you to take money in flexible lump sums, meaning you can withdraw a little at a time or take your whole pension at once.
Any money you don’t withdraw remains invested, potentially continuing to grow over time. Of course, that also brings the risk that your invested money loses value should markets perform poorly.
This approach can be appealing if you want to keep control over your pension while still having access to cash when you need it. However, this flexibility also comes with responsibilities. You’ll need to consider how much to withdraw, the impact on your taxes, and the effect on the remaining pension balance.
How does UFPLS work?
When you reach age 55 (57 from April 2028) you can take up to 25% of your pension pot as a one-off tax-free lump sum. Any income you then take from your pension – such as through an annuity or drawdown – is taxable at your marginal rate.
UFPLS works differently. Although you can take all your pension pot in one go, with 25% being tax free, typically UFPLS is used to take money out over time. You keep all of your pension pot invested and then, each time you take a withdrawal, 25% of it is tax-free and the remaining 75% is taxable.
It’s a flexible pension withdrawal option: you can take multiple UFPLS payments over the years, allowing you to manage your income and potentially avoid withdrawing more than you need at any given time.
The money that remains invested continues to be subject to market fluctuations, meaning its value can go up or down.
Examples of UFPLS withdrawals
Imagine you have a £150,000 pension. Here are a couple of examples of how UFPLS might work.
Example 1 - you take a big withdrawal for a major purchase of £30,000. Normally:
£7,500 (25%) would be tax free.
£22,500 would be taxed as income.
Example 2 - you take smaller withdrawals of £5,000, perhaps every few months to top up income from other sources. Normally:
£1,250 (25%) would be tax free.
£3,750 (75%) would be taxed as income.
Whatever you withdraw, the money that remains invested would continue growing or falling depending on market conditions. This is why you need to monitor your investments and withdrawal strategy to ensure your pension lasts.
Why might you choose UFPLS?
UFPLS is often chosen for the flexibility and simplicity it offers. It lets you take money only when you need it, with every withdrawal being a combination of tax-free cash and income. However, this flexibility comes with responsibility. You are responsible for making sure your pension savings last as long as you need: careful planning and regular review are essential.
Reasons people might choose UFPLS include:
Flexible cash access: You can take small amounts to cover specific expenses or larger amounts if needed.
Potential for continued growth: Money left in the pension can stay invested, offering the potential for growth over time.
Control over taxes: By spacing withdrawals over different tax years, you may be able to manage your income tax liability more efficiently.
Changing income needs: If your retirement income requirements vary from year to year, UFPLS lets you adjust withdrawals as your circumstances change.
If you want flexibility when accessing your pension savings, we recommend talking to a financial adviser. They will give you personalised advice on the pros and cons of drawdown and UFPLS based on your circumstances and goals – including on the important issue of your tax position.
Are there any disadvantages of UFPLS?
UFPLS is not suitable for everyone, and there are several potential downsides to consider:
Sustainability of withdrawals: Taking too much too soon can leave you short of income in later years. It’s important to plan withdrawals carefully.
Investment risk: The money that remains invested can rise or fall in value. This means your pension could be worth less than expected if markets perform poorly.
Tax implications: Each UFPLS payment is treated as income. Large or frequent withdrawals could push you into a higher tax bracket.
Long-term planning: Unlike annuities, there is no guaranteed income. You must make sure your withdrawals are sustainable over your entire retirement.
It’s worth noting that UFPLS is generally considered most suitable for people who are confident in managing their own investments or who have access to professional financial advice. Those who prefer guaranteed income may find an annuity or structured drawdown plan more suitable.
What about UFPLS and the Money Purchase Annual Allowance (MPAA)?
When you take a UFPLS payment, you are considered to have flexibly accessed your pension. This reduces your future annual allowance for paying into a defined contribution (DC) pension from £60,000 to £10,000 per tax year.
The MPAA is important to understand because if you and your employer contribute more than the allowance it can lead to tax charges. If you plan to continue contributing to a pension after taking UFPLS, it’s essential to be aware of the MPAA and factor it into your retirement planning.
Even if you don’t currently plan to make further contributions, it’s useful to know about the MPAA, as it may affect any workplace or personal pension savings you intend to make in the future.
How is tax paid on UFPLS withdrawals?
Your pension provider will usually handle tax automatically. The taxable portion of each withdrawal is typically sent to HMRC and deducted before you receive the payment.
Some important points to note:
The first payment may be taxed using an emergency tax code, which could result in too much tax being taken initially.
Taxable income from UFPLS is added to any other income in the same tax year, which could push you into a higher tax bracket.
Tax rules can change, and you may need to settle any difference directly with HMRC.
Planning withdrawals carefully can help manage your tax bill, especially if you expect other sources of income in the same tax year. Spreading withdrawals over several years can sometimes help reduce the overall tax impact.
Setting up a pension lump sum facility
Not all pension providers offer lump sums, and those that do may have set up and withdrawal charges as well as annual management and investment fees. Check this first before transferring or applying, and make sure you won’t give up any valuable benefits in the process.
Providers who offer lump sum facilities may charge set up, transfer or withdrawal charges, as well as management charges – but some providers will waive one or more of these charges. Also, different pension providers will have different rules on how often you can make lump sum withdrawals in a year, and on the minimum withdrawal value.
As you can see, it is always best to check with your pension provider if they offer UFPLS, whether there are any restrictions, and what their charges are. Ask the same questions to any other providers you are considering.
What are some alternatives to UFPLS?
If UFPLS doesn’t feel right for you, there are other retirement income options to consider. Each has its own advantages, depending on whether you prioritise security, flexibility, or access to cash.
Annuity: This option provides a guaranteed income for life, no matter how long you live, or for a fixed-term. It removes the worry of running out of money and makes budgeting easier, since you’ll know exactly how much you’ll receive each month. You may even secure a higher income for life with an enhanced annuity if you have certain health or lifestyle conditions.
Pension drawdown: Drawdown is a way of turning your pension savings into a flexible retirement income. Similar to UFPLS, you keep your pension pot invested and draw money from it as and when you need it. It can be a more flexible way to access your tax-free cash and income, but we recommend talking to a financial adviser about your circumstances when comparing drawdown with UFPLS.
Taking your pot as cash in full: Some people choose to cash in their pension completely. While this gives you full control of your money, it could lead to a big tax bill and means you’ll no longer have a pension to provide income in the future. Careful planning is vital if you’re considering this route.
Blended approach: You may prefer a mix of options to balance flexibility with security. For example, you could use part of your pot to buy an annuity that covers your essential bills, while keeping the rest in drawdown to provide additional income and potential investment growth. This way, you get the reassurance of guaranteed income with the freedom to adapt as your needs change.
Exploring these choices can help you find the right balance for your lifestyle, goals and attitude to risk – and remember, you don’t have to commit to just one option.
UFPLS can be a powerful tool for flexible retirement planning, but it requires careful thought and management. Ensure you understand the risks, your options, and how withdrawals affect your tax situation. You can get free guidance about accessing your pension savings through the government-backed Pension Wise service, or talk to an independent financial adviser to help make a choice that suits your circumstances.