Taking a lump sum from your pension? Think ‘Uffplus’

Until April 2015, when the pension ‘freedom and choice’ reforms were introduced, it was quite usual for ‘new pensioners’ to make use of the 25% tax-free pension commencement lump sum (PCLS) facility and take a sizeable amount of money, tax free, from their pension pot. But the reforms introduced an alternative which could leave you both better off and paying less tax.

Many ‘helpful articles’ about the choice appeared at the time of the pension reforms: that on the Daily Mail’s ‘This is Money’ website is still, nearly two years on, a good guide. https://bit.ly/2kq6fzf

Prior to the reforms, new pensioners could take 25% of the value of their pension pot as a tax-free lump sum – however, if they did so, they then had to move the balance from the pension (saving) scheme and use it to either buy an annuity or income drawdown product. The alternative introduced by the reforms is uncrystallised funds pension lump sums –‘UFPLS’ or “Uffplus” – which could, depending on your circumstances, be a much better long-term choice. UFPLS means that you can take smaller amounts, the first 25% of each being tax-free, throughout your retirement and leave/invest the balance in a pension (savings) scheme that attracts interest. 

You have to decide which path you want to follow before you take anything from your pension pot as your existing pension scheme may not allow you to make UFPLS withdrawals: if it doesn’t, you’ll need to move it to one that does. Once open you can use your UFPLS pension fund almost like a bank account: there’s no limit to how much you withdraw or how often you do so. Every time you make a withdrawal the first 25% is both tax free and isn’t set against your annual personal allowance.

Prompted by research that showed that savers who decided not to taken the 25% tax-free PCLS “could be ￡64,000 better off and pay less tax” during their retirement, the article goes on to give a simple, back-to-back comparison using two ￡100,000 pension pots to illustrate the relative effect of each scheme.

‘William’ takes his 25% PCLS and then withdraws ￡5,000 a year. After 25 years he’s taken a total income of ￡125,000, plus the ￡25,000 PCLS – a total of ￡150,000. He paid a total of ￡25,000 in tax so he actually received a total of ￡125,000 from his pension fund.

‘Sarah’ doesn’t take the 25% PCLS, opting for UFPLS instead. She also withdraws ￡5,000 a year, the first 25% of each being tax free. The balance of her fund grows at 5% a year. After 25 years she’s withdrawn an income of ￡125,000 and paid ￡18,750 in tax so she’s received a total of ￡106,250 from her fund. Although that’s considerably less than William, the balance of her fund has continued to grow – in fact she still has ￡83,068 left.  

Having saved for your retirement it’s important that your pension pot delivers what you want – a ‘financially secure and comfortable retirement’ – and that means making sure it delivers the best value. Choosing whether to take a 25% tax-free PCLS or go down the route of UFPLS is another decision you need to get right as, once made, there’s no going back.

One Financial Solutions is here to help you. As independent financial advisers we’ll review your circumstances and help you make a decision that’s best for you. It’s good to talk so please call us on 020 3714 9565 for a confidential chat or ask us to call you by sending an email to [email protected].