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6 min read 5 Apr 22
Discover useful guidance to help you consider whether flexi-access drawdown or UFPLS is the most appropriate route to achieve the client’s objectives for accessing benefits from their pension pot.
Pension flexibility, introduced in April 2015, provides customers wishing to access their pension funds with a wide choice of vesting options. But which option do they select? Obviously this is a decision to be made after full consultation with their adviser, dependent on the individual’s situation, needs and requirements. Although we’ve titled this article as a comparison between flexi-access drawdown (FAD) and uncrystallised funds pension lump sum (UFPLS), there are a number of other options and issues to be considered – you’ll find full details of those options in our technical centre (links below). However, the purpose of this article is to cover the process you can use to help a client decide which of the various options are suitable for them.
Most major decisions are arrived at after contemplation of a series of smaller decisions. These smaller decisions can be mapped using various methods and in this article we will cover two such methods:
We’ve put together a withdrawal process decision tree that addresses many of the smaller decisions you may wish to address, although there may be additional factors to consider. If future funding is a consideration, then remember the rules around pension recycling.
An alternative to the decision tree is a basic questioning process. Although the basic question process isn’t as visual, it allows us to run a case study alongside the process, to provide a worked example with the consideration of tax as an integral part of the process.
In summary, the client crystallised £24,000 of his fund. This provided a PCLS of £6,000 and the client can draw £5,000 gross (£4,000 net)* from his crystallised drawdown fund to provide the full £10,000 required. This process keeps the crystallisation down to the minimum required to fulfil client requirements, leaving £76k uncrystallised which can be used to generate future PCLS / income as required.
In this example an UFPLS would not meet the clients objective of only having £5,000 of taxable income, as the gross UFPLS figure to produce this net amount is £6,666.66. So this would be below the net £10,000 the client requires.
Although the above calculations reflect the actual tax payable on withdrawal, we should also be mindful that emergency tax may be applied to the income payment by the provider. This should be checked with the provider in advance of any withdrawal, and even though any resulting overpayment can be reclaimed by the client, the initial impact of this shouldn’t be ignored. Our emergency tax tool may help you calculate the effect on withdrawals.
* Scottish taxpayers will pay the Scottish rate of income tax (SRIT) on non-savings and non-dividend (NSND) income. NSND income includes employment income, profits from self-employment (including sole trades and partnerships), rental profits, and pension income (including the state pension). Similarly, from 6 April 2019 Welsh Taxpayers pay the Welsh Rate of Income Tax (CRIT (C for Cymru)) on NSND income.
Other tax and deductions such as Corporation Tax, dividends, savings income and National Insurance Contributions etc. will remain based on UK rules. This could mean the amount of income tax relief which can be claimed on pension contributions by Scottish and UK tax payers may not be the same. For more info on SRIT and how this works in practice, please visit our facts page. For more info on CRIT and how this works in practice, please visit our facts page.
On the surface of it, the process of deciding which withdrawal method is the most suitable appears to be reasonably complicated. However, in reality it's about using a limited number of decision points to help your clients decide which withdrawal method suits them.
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