A Look at the Uncrystallised Funds Pension Lump Sum (UFPLS)
In this second post in our series on pension decumulation rule changes effective from 6 April 2015, we will be looking at a new triumph for the Plain English Department in the Treasury – the uncrystallised funds pension lump sum aka the UFPLS. Those sitting the CII AF3, R04 or J05 should find this post particularly useful in their revision.
Since 6 April 2015, where an individual wishes to take a lump sum withdrawal from their pension, instead of designating part of the fund to flexi-access drawdown, making a 100 per cent withdrawal taxed at their marginal rate of income tax and taking the related tax-free lump sum, a member can just take an UFPLS, leaving the rest of their pension arrangement untouched.
What qualifies as an Uncrystallised Fund 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 will not be an UFPLS. This excess can still be paid as an authorised lump sum, but it will be 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 either primary or enhanced protection (and the member had a right to a tax-free lump sum of greater than £375,000) on 5 April 2006 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, but they will be able to do so from their other eligible uncrystallised money purchase pension plans.
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 per cent of the amount of the payment they are seeking to withdraw.
Schemes or provider don’t have to offer this UFPLS flexibility
Flexibility through UFPLS will be available legislatively i.e. via a statutory override to existing scheme rules, but this does not mean that schemes or providers have to offer it. Many will do so however as it will allow them to offer increased flexibility, without the need to provide full flexi-access drawdown.
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.
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Over to You…
What do you think of the new pension decumulation rule changes? We’d love to hear from you!