Uncrystallised funds pension lump sum (UFPLS)

Taking the UFPLS is a BCE 6 (just like taking a pension commencement lump sum or serious ill-health lump sum). Where the member has not reached age 75, an uncrystallised funds pension lump sum is taxed as follows: 

• 25% is paid tax-free
  
  
• 75% is taxed as pension income in the same way as a pension paid under a registered pension scheme. This means that the payer of the lump sum will deduct and account for income tax under the requirements of the PAYE regulations 

Where the member has reached age 75, an uncrystallised funds pension lump sum is taxed as follows: 

1. If the amount of the uncrystallised funds pension lump sum does not exceed the member’s available lifetime allowance at the time it is paid, it is taxed in the same way as above
   
   
2. If the lump sum exceeds the member’s available lifetime allowance at the time the lump sum was paid then
    
   • that part of the lump sum equal to 25% of the member’s available lifetime allowance at the time it is paid is not liable to tax, i.e. it is paid tax-free
     
     
   • the rest of the lump sum is taxed as pension income in the same way as a pension paid under a registered pension scheme. This means that the payer of the lump sum will deduct and account for income tax under the requirements of the PAYE regulations.

Where the uncrystallised funds pension lump sum is paid after the member has reached age 75, then when calculating the amount of the member’s available lifetime allowance at the time the lump sum is paid, any lifetime allowance used up by a Benefit Crystallisation Event 5, BCE5A or BCE 5B (testing against the lifetime allowance at age 75) is not taken into account. 
 

Example of how UFPLS is taxed 

A client (age 60) has a fund of £100,000 and wishes to take the full fund as a lump sum. They'll get £25,000 tax-free, with £75,000 taxed at their marginal rate. If this is the only income they have, they will fall into higher rate tax and get £82,500 after tax*.

*Tax calculation (using current tax year UK rates and allowances*)
£25,000 tax-free + £75,000 taxed
Tax (£12,570 x 0%) + (£37,700 x 20%) + (£24,730 x 40%) = £17,432
£75,000 - £17,432 = £57,568
£57,568+ £25,000 (the tax-free bit) = £82,568

If the same client decided that they only wished to withdraw sufficient to utilise their Personal Allowance they could take £16,760 UFPLS a year, they'd get £4,190 tax-free and £12,570 taxed at their marginal rate.

If they had no other income, currently their personal allowance would cover the £12,570 - so there would be no tax payable.

This produces the same result as accessing their funds using a phased strategy.

However, as soon as they start to receive State pension (or any other income that takes them over the personal allowance tax threshold), tax is payable on the sum of their income above the Personal Allowance (including the taxable element of an UFPLS).

It is however, very likely that emergency tax will be applied to the payments from UFPLS. Scheme administrators may apply emergency tax in respect of all UFPLS payments, even if a tax-code is held, as such, it is important to check the tax situation with the scheme administrator prior to drawing an UFPLS.

Using the same example as above, assuming no other income and Emergency Tax code for the current tax year - 1257L. The client will still receive £25,000 of the UFPLS tax free, but the actual tax raised on the balance would be:

Therefore taxpayers will find that tax of £32,024 will be deducted using the emergency method, instead of the expected £17,432. So the payment they receive would be £67,976 and not £82,568. If this method means the client has overpaid tax they can ask for this to be repaid in the same tax year. Otherwise HMRC will calculate whether they have over or underpaid tax in the following year.

*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.
 

Can you take 25% tax-free and leave the rest unvested? 

Not through UFPLS. As mentioned above, each UFPLS payment has a tax-free and a taxed element. If a client only wants to take a tax-free sum but no income or taxed sum, they’ll have to designate funds as available for flexi-access drawdown, take the 25% PCLS and no income.

There’s no PCLS payable in relation to an UFPLS. For a PCLS to exist there must be an attaching entitlement to income through drawdown or an annuity (lifetime annuity or scheme pension) - hence described as a tax-free element in an UFPLS, rather than PCLS.