The changes to pensions introduced in April 2015 has led to a collection of new financial terms being heard over the past year or so, with the ‘Uncrystallised Fund Pension Lump Sum’ being perhaps one of the most daunting to read on the page and trickiest to say out loud. Thankfully, it can be shortened to UFPLS, but that doesn’t help a great deal in understanding exactly what the term means.
A UFPLS is simply the official term for a withdrawal, either regularly or as a one-off, from a pension fund. These withdrawals can only be made from a pension that has not ‘crystallised’ – that is, it has not been used for an annuity purchase or to enter a drawdown scheme. If you take a UFPLS, 25% of the withdrawal will be tax-free. The other 75% is taxed as income, with the rate being determined by the amount you withdraw and any other income during the tax year.
The UFPLS was introduced by the government so that people had more flexibility in choosing their retirement benefit in an effort to remove the feeling of having no choice but to purchase a pension income product. It allows the person saving to access their fund much more easily in lump sums, which the government hopes will motivate a larger number of people to save for their retirement. However, some commentators, particularly within the press, have reported this freedom in a negative way as being able to use their pension fund in the same way as a bank account.
There are some potential issues surrounding UFPLS, however, such as those choosing to withdraw from their pensions paying too much tax if they do so early in the financial year. This is because income received at the start of a new tax year is interpreted by the tax office as the amount they expect you to receive each month throughout the rest of the year. Those making a one-off withdrawal could therefore be overcharged by HMRC, which means they will have to either wait for an automatic repayment or claim it back themselves. As ever, if you are considering a UFPLS or any other form of pension access, then please consider consulting an independent financial adviser, who will be able to help you at every stage in the process.