What Is An Uncrystallised Funds Pension Lump Sum?

How Uncrystallised Funds Pension Lumps Sums Work

You can take an uncrystallised funds pension lump sum of any size from your pension pot whenever you need to.

Other than the obvious restriction of the size of your pension pot, you’ll also need to consider your pension lifetime allowance. You must have at least some lifetime allowance available to make a UFPLS withdrawal and the 25% tax-free element can’t exceed your available lifetime allowance.

The Difference Between Pension Drawdown and UFPLS

Although taking your pension via a series of uncrystallised funds pension lump sums is slightly different from income drawdown, the same danger applies when it comes to your fund running out too soon.

This could happen if you withdraw too much or your pension investments underperform.

Can I Take a UFPLS From My Pension?

You can only take a UFPLS if you’re in a defined contribution pension – it’s not available for final salary schemes. Other conditions include:

• You must be at least 55 (unless you qualify for an ill health pension or your scheme has a protected retirement age)
• The payment must not be a pension commencement lump sum (PCLS), which is a tax-free payment you may be entitled to take when you start drawing your pension
• The payment must not be a trivial commutation lump sum, whereby you’re entitled to take up to three small defined contribution pension pots of £10,000 as lump sums
• If you’re under 75, the lump sum you’re withdrawing must not exceed your available pension lifetime allowance or you’ll face either a 55% or 25% lifetime allowance charge on the excess, depending on if you take it as a lump sum (the former) or income (the latter)
• If you’re over 75, you must have some of your lifetime allowance available, with the tax-free element you can receive being 25% of your available LTA and the remainder being taxed as income.

Who Can’t Take a UFPLS from Their Pension?

You can’t take an uncrystallised funds pension lump sum if:

• The pension assets you’re seeking to draw the UFPLS from represent to any extent a disqualifying pension credit (which arises in the case of divorce, where an ex-spouse/ex-civil partner received a share of your pension in a divorce after your pension had been crystallised [i.e. was already in payment])
• If you’ve applied for pension lifetime allowance protection and have enhanced protection, with or without primary protection, and also have protection for lump sum rights in excess of £375,000 as of April 5th 2006
• If you have no lifetime allowance available, or if your available lifetime allowance is less than 25% of the sum being paid.

Advantages and Disadvantages of UFPLS

There could be a number of benefits to taking your pension via uncrystallised funds pension lump sums, especially if:

• You’re looking to take a varying amount of money out of your pension each time
• You don’t want / need your 25% tax-free cash upfront and would prefer to spread it over time
• You don’t want / need a regular pension income.

On the other hand, some of the drawbacks of taking uncrystallised funds pension lump sums include:

• You can’t just take your tax-free cash — it’s got to come with a taxable element
• It’s not as widely available as income drawdown or annuities
• There tends to be more administration involved with every UFPLS you take, which means it’s not a particularly attractive option for those wanting to take a regular monthly income
• Funds in a pension or income drawdown are held outside your estate for inheritance tax purposes; funds withdrawn from your pension via a UFPLS and held in a bank account, for instance, could be subject to inheritance tax
• Taking a UFPLS immediately triggers the reduced money purchase annual allowance; for pension drawdown, this isn’t triggered by simply taking your tax-free cash entitlement, only when you take an income
• As with income drawdown, you could run out of cash if your investments underperform or the lump sums you take are too large.

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