A Look at the Uncrystallised Funds Pension Lump Sum (UFPLS)
In this second post in our series on pension decumulation, we will be looking at a triumph for the Plain English Department in the Treasury – the uncrystallised funds pension lump sum aka the UFPLS. Those sitting the CII R04, AF7 or J05 should find this post particularly useful in their revision.
On 6 April 2015, uncrystallised funds pension lump sums (UFPLS) were introduced as an option for members of taking pension benefits from money purchase schemes without going into either a drawdown arrangement or buying an annuity.
What qualifies as an Uncrystallised Funds Pension Lump Sum?
To qualify as an UFPLS, it must be payable from uncrystallised funds held in a money purchase arrangement, and the member must have reached the normal minimum pension age (currently 55) or be eligible for early retirement due to ill-health.
A Tax-Free and a Taxed Element
Each UFPLS payment has a tax-free and a taxed element. The tax-free element is not, however, a pension commencement lump sum (PCLS) as the lump sum is paid out of uncrystallised funds.
What if the member has not reached age 75?
Where the member has not reached age 75 when an UFPLS is paid, it is a benefit crystallisation event (BCE 6). This means that if the amount of the lump sum paid uses up all the member’s lifetime allowance, any excess paid over the available lifetime allowance is paid as a lifetime allowance excess lump sum and is liable to income tax at 55%. One alternative, where there is insufficient lifetime allowance remaining, is for the member to take an UFPLS up to their available lifetime allowance and then designate the remaining funds into a flexi-access drawdown. They will still have a lifetime allowance excess tax charge to pay, but this time it will be at the income rate of 25%.
And for those members aged 75+?
Where the member is aged 75 or over, and they have more available lifetime allowance than the amount of the UFPLS, then the lump sum will be taxed in the same way as if the member was under age 75. If a member aged 75 or over has less lifetime allowance than the amount of the UFPLS, then an amount equal to 25% of their available lifetime allowance can be paid tax-free, with the remainder taxable at the member’s marginal rate.
Why the different method of taxing payments?
The different method of taxing payments for members pre- and post- age 75 is because at age 75, all uncrystallised benefits will have been tested against the lifetime allowance already, and any lifetime allowance charge will have been deducted at that time.
Who isn’t able to take advantage of UFPLS?
A member with primary or enhanced protection where the lump sum protection is for more than £375,000 cannot be paid a UFPLS, because allowing the payment of a lump sum that was 25% tax-free may enable the member to receive higher amounts of tax-free payments than they are currently entitled to.
Where a member has scheme-specific tax-free cash protection on a money purchase pension plan, they will not be able to take the benefits from that particular plan via an UFPLS unless they give up the rights to the higher tax-free cash.
They’ll also be precluded if they are entitled to a lifetime allowance enhancement factor – due to primary protection, pension credits from previously crystallised rights, non-residence, transfers from recognised overseas pension schemes or pre-commencement pension credits – and the available portion of their lump sum allowance is less than 25 percent of the amount of the payment they are seeking to withdraw.
Schemes or providers don’t have to offer this UFPLS flexibility
Flexibility through UFPLS is available legislatively even where the scheme rules do not allow it (via a statutory override to existing scheme rules), but this does not mean that schemes or providers have to offer it.
Two More Points to Remember…
Two further points worth remembering are that UFPLS will not be available to dependants on the death of the member, and that taking an UFPLS is a trigger event for the Money Purchase Annual Allowance (MPAA) rules.
Over to you!
Try the exam question below (from our R04 mock paper):
Kim is 60 and has no taxable income in 2019/20. She has a personal pension valued at £300,000 and she decides to take £40,000 of this fund as an uncrystallised funds pension lump sum (UFPLS). What is the net payment that Kim will receive?
The answer is below.
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Answer D: An uncrystallised funds pension lump sum (UFPLS) is a lump sum payment from uncrystallised defined contribution pension funds. Under a UFPLS, typically 25% of funds are taken tax-free with the remainder taxed as income. Therefore, if Kim takes £40,000 of her £300,000 pension funds as a UFPLS, she will receive 25% tax-free (£10,000), and the remaining £30,000 will be taxed as income.
The income tax personal allowance in 2019/20 is £12,500, therefore the remaining £17,500 (£30,000- £12,500) will be taxed at 20% = £3,500, this is the only tax payable on the UFPLS. She therefore receives a net payment of £40,000 – £3,500 = £36,500.