Uncrystallised funds pension lump sum (UFPLS) explained

When you approach retirement, you’ll need to decide how you want to draw from a personal pension. As part of this you can consider taking your maximum tax-free pension lump sum, which is usually 25% up to £268,275 across all your pensions. You can then move the remaining pension into a ‘drawdown’ pot from which you can take a taxable income as and when you need to. Alternatively, you can purchase an annuity, which is an income guaranteed for life.

Many people automatically take their maximum tax-free pension lump sum in one go. You can do so from the minimum retirement age, which is currently 55 but 57 from 2027 as things currently stand. In many circumstances this can be a smart strategy. You can use the cash in the early years of retirement, pay off your mortgage or use it to make ISA contributions to maximise tax efficiency. However, there are alternative ways of drawing on your pot to consider, notably the UFPLS – or uncrystallised funds pension lump sum.

Despite being a top contender for ‘worst piece of financial industry jargon ever’, a series of UFPLS can sometimes be useful in planning withdrawals from your personal pensions including the Charles Stanley Direct SIPP.

What is UFPLS?

UFPLS are like pension drawdown in that they offer a flexible way to drawn on your personal pension. However, a UFPLS is taken directly from your pension rather than via a designated drawdown fund. Essentially, it means slicing off part of your pension and leaving the rest untouched – or in industry parlance ‘uncrystallised’. As with drawdown, anything you don’t withdraw can stay invested as you choose.

Every time you take money from your pension pot as an UFPLS, 25% of the amount is tax-free with tax payable at your highest marginal rate of income tax on the other 75%. For example, if you had a £100,000 pension and took a £20,000 UFPLS, usually £5,000 of it would be tax free. The other £15,000 would be taxed as income.

This contrasts with drawdown where your 25% tax free element is taken all at once at the start, and all subsequent income is taxable. Essentially, with a series of UFPLS the tax-free part of your pension withdraw comes on an ad hoc basis rather than all at once.

You can take a UFPLS at any point once you reach minimum retirement age, provided you haven’t already accessed the pot in any other way, such as buying an annuity, starting drawdown income, or taking a tax-free lump sum. After you withdraw one UFPLS, all these options are still available to you in respect of the remainder of your pension pot, as well as the possibility of taking further UFPLSes.

Advantages of UFPLS

UFPLS allow you to access your pension savings if you are looking to take a large withdrawal. Rather than setting up regular income payments, you withdraw money on demand as and when you need it. However, bear in mind that leaving your pension pot untouched for longer offers the potential for more compounding investment returns and greater tax free cash in the future.

You cannot use your pension in this way if you have already taken a 25% tax-free lump sum or used some of the money to buy an annuity. But it means you can put off making a big decision – like buying an annuity or taking regular income – whilst still accessing your wealth.

The flexibility of a UFPLS makes them worth considering as an interim measure if you need access to a lump sum but you haven’t decided how you’d like to take your remaining pension benefits. You can also set up a stream of UFPLS slices if you want regular income and to stagger taking tax free cash – as shown in the simplified example illustration below. It can also be useful if you have a small pension pot where it might not be worth buying an annuity or setting up drawdown.

Disadvantages of UFPLS

Taking lump sums from a pension can be a complex area and great care needs to be taken to ensure any course of action is right for you.

As with drawdown, taking too much in one go could leave you with insufficient savings for later life and you could miss out on potential investment growth. Unlike some other options (such as an annuity, which provides a guaranteed income for life), you’re responsible for ensuring your pension lasts as long as you need it to. If your withdrawals aren’t sustainable, or your chosen investments perform poorly, you could find yourself without enough income later.

Taking large withdrawals could also affect your tax situation, though the flexibility of an UFPLS means you can tailor it to maximise tax efficiency. For example, for someone with no other taxable income the taxable element could be sized according to the income tax personal allowance. Please note pension and tax rules can change, and any benefits depend on your circumstances.

Very importantly, care needs to be taken around a UFPLS if you are planning to make significant pension contributions in the future. Once you've flexibly accessed your pension, which includes taking an UFPLS payment, you’ll trigger the ‘Money Purchase Annual Allowance’ or MPAA, which means the maximum you can contribute to your pensions is reduced from £60,000 to £10,000 (including tax relief) per tax year.

In contrast, just taking the tax-free cash from your pension and putting the remainder into drawdown with no income doesn’t trigger the MPAA. This means drawdown can be the preferred route for those intending to add to their pension provision, though you do need to be aware of the rules relating to the ‘recycling’ of tax-free cash i.e., using any tax-free money from your pension to increase contributions. There’s guidance on this from HMRC here.

Finally, it’s also important to note that when you first take a UFPLS you’ll probably be subject to an emergency tax code at first, which could lead to you paying more tax than is due until HMRC sends the correct tax code to your pension provider. However, you should be refunded any tax that you overpay.

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