Main Features of UFPLS
Age and Health
You can choose how much you want to withdraw without reference to any rates or limits other than the size of your pension fund.
If you or your spouse is relatively young, a secured pension (lifetime annuity or scheme pension) would be less attractive due to the lower mortality factor.
The value of any uncrystallised segments may go down as well as up and investment returns may be less than those shown in the illustrations.
This could result in a lower income if / when an annuity is eventually purchased.
Please be aware that there may be occasions when an individual fund or funds may have a higher risk rating than your overall stated attitude to risk. If this is the case, then the overall risk rating applied to all of the combined funds being recommended is still designed to meet your stated tolerance.
Annuity rates may be at a lower level when annuity purchase takes place and there is no guarantee that your income will be as high as that offered under the other options referred to earlier.
There is no guarantee that annuity rates will improve in the future. They could be lower if / when you decide to purchase an annuity than they are currently. Your pension may be lower than if you bought a lifetime annuity now.
You can take all of your pension fund as a lump sum or take your fund in stages over a number of years.
An annuity or drawdown pension can be purchased with any of the funds you withdraw (or you can utilise the funds in any way you see fit).
You can elect to take any uncrystallised pension funds in other formats such as annuity purchase or flexi-access drawdown.
Your uncrystallised pension funds continue to be invested, thus providing you with the possibility of higher future income. This depends largely on how much you take out of the pension fund and future investment returns achieved on the residual fund.
You will be able to change the shape of your retirement income to reflect your personal circumstances in the future. Should your health deteriorate, it may be possible to achieve a better annuity rate (i.e. higher income) in future. It is also possible to postpone the choice of whether to include any survivor’s pensions until a lifetime annuity is purchased – this could be valuable for someone whose spouse is in poor health.
You will receive the first 25% of all withdrawals tax free and the remainder will be taxed at your marginal rate(s) of tax.
You will not receive all of your tax free cash as a lump sum at outset, if you are accessing your pension fund gradually over time and using the cash to supplement your income.
The provider of your pension plan will make your payment through the PAYE system and you should be aware that if they do not hold your correct tax code, an emergency code will be used and you may need to reclaim or pay additional tax through your self-assessment tax return or by way of a separate claim.
You can structure your income to mitigate liability to personal income tax. By reducing your withdrawal in some years you may be able to avoid a higher rate tax liability.
All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs’ practice. Levels and bases of tax relief are subject to change.
Transfers & Withdrawals
The first 25% of any lump sum is tax free and you will be taxed at your marginal rate(s) on the remainder.
You can take all or part of your pension fund at any time.
Benefits may commence at any time from the age of 55. From 6 April 2011 rules were introduced such that anyone with a defined contribution pension arrangement (not final salary) who had not, before that date, taken a pension, could postpone the decision to take benefits from their scheme indefinitely (the previous requirement was that an income had to be secured by age 75 at the latest).
With UFPLS, in the first year of retirement or drawing benefits you decide on the level of income that you require and ask the pension provider to make payment of that amount to you as a lump sum. 25% of each UFPLS is tax free with the balance taxable as earned income. The remaining pension fund is left invested until required. In the second year (or when required) you decide how much income is needed and withdraw another UFPLS from your uncrystallised pension plan – 25% tax free and the balance taxable. In each subsequent year (or on an ad-hoc basis) the same process is repeated allowing you to take account of changing personal and family circumstances. This process can be continued indefinitely subject to there being sufficient funds remaining.
Some products will not be able to support UFPLS and you may need to transfer your pension fund before being able to withdraw your funds.
Long term care
Any uncrystallised segments will be taken into consideration on the basis of the annuity income they could provide should you require long term care in the future. If you have withdrawn all of your pension fund and it is in a bank account or other savings vehicle it may also be taken into account.
Treatment after death
Any pension funds that are still uncrystallised on your death (i.e. remain in your pension plan untouched) can be paid to your beneficiaries as a lump sum, used to provide an annuity income or moved into drawdown to be drawn on as and when required. Funds withdrawn as a lump sum or as annuity or drawdown income will be tax free if you died before age 75. On death after age 75, both income and lump sum payments (annuity or drawdown) are taxed on the recipients at their marginal tax rate(s.
If you take the UFPLS and do not spend it, it will be included in your estate and be assessable for inheritance tax.
Type of charges
There may be ongoing charges for any uncrystallised segments.
Future planning issues
If your health / circumstances change, you can move any uncrystallised segments into drawdown and or / purchase an annuity.
Further tax-relievable pension contributions may be made before age 75. Where an UFPLS payment has been taken, tax relievable contributions to money purchase pensions will be limited to the £4,000 money purchase annual allowance rather than the standard annual allowance of £40,000.
When you first flexibly access your pension, the scheme administrator has to provide a statement to you within 31 days. You must then notify any other schemes that you are an active member of (i.e. where contributions are being paid to a money purchase scheme or you are accruing benefits under a cash balance or hybrid scheme) within 91 days of receiving their statement, so that they're also aware that the £4,000 money purchase annual allowance will apply.
Updated as of 3rd April 2020