Uncrystallised Funds Pension Lump Sums, explained

Uncrystallised Funds Pension Lump Sums (UFPLS) allow people to withdraw lump sums from their pension – with 25% tax-free and the rest taxed as income – without needing to enter income drawdown or purchase an annuity.

As part of our Bitesize Technical series, Senior Technical Consultant Joshua Croft explains more about UFPLS.

Key insights on UFPLS

UFPLS allows people with defined contribution pensions to withdraw lump sums directly from their pension. As long as the funds have not already been designated for income (i.e. uncrystallised), they can be accessed after reaching the normal minimum pension age (currently 55), under ill-health conditions, or with a protected early retirement age.

A key feature of UFPLS is that typically 25% of the withdrawal is tax-free, while the remaining 75% is taxed as income. The tax-free portion is limited by the member’s available Lump Sum Allowance (LSA) and Lump Sum and Death Benefit Allowance (LSDBA), but withdrawals exceeding these limits can still be made, with the excess subject to income tax.

UFPLS offers flexibility, allowing people to make ad-hoc withdrawals or receive a regular income, either monthly, quarterly, or annually. It also enables the option to withdraw the entire pension fund as a lump sum. Regular UFPLS payments can be part of a tax-efficient strategy, by spreading the tax-free and taxable portions across multiple withdrawals, thereby helping to manage income within tax brackets.

Taking a UFPLS payment triggers the MPAA, which reduces the amount of tax-relievable contributions that can be made to defined contribution pensions in the future.

More Bitesize Technical

Take a bite out of ‘Lifetime annuities, explained’, the next instalment of our pension benefits Bitesize Technical series, or start from the beginning, here.