The new pension flexibility brought in from April 2015 introduced some new ways to take retirement savings. Depending on the product it may be possible to take multiple partial UFPLSs rather than the whole fund at once. Certain conditions apply to UFPLS and are outlined below.
The individual must be over age 55 (or eligible for early retirement due to ill-health or has a protected pension age).
The individual must have available lifetime allowance (LTA):
It is only available from uncrystallised funds (i.e. not drawdown)
It is not available if:
This means the option can be offered by schemes which cannot offer a drawdown option but it also has consequences for taxation.
If the individual is below age 75, 25% of the value of the UFPLS will be tax free. 75% of the value of the UFPLS will be added to the individual's taxable income in that year and taxed accordingly.
If the individual is 75 or over, 25% of the lower of the value of the UFPLS and the available lifetime allowance is tax free. The balance will be added to their taxable income in that year and taxed accordingly.
Taking an UFPLS will also trigger the money purchase annual allowance (MPAA) of £4,000.
Nabeel, aged 55, lives in England and is a basic rate tax payer, decides he needs a lump sum of £10,000.
|UFPLS||PCLS via drawdown,0% income|
|Amount crystallised||£11,765 before tax||£40,000|
|Amount added to taxable income||£8,824||£0|
|Income after tax||£7,059||£0|
|Total received||£10,000 (£2,941 + £7,059)||£10,000|
|Annual allowance for future contributions||£4,000||£40,000|
UFPLS replaces triviality for money purchase arrangements and is available from age 55 (rather than age 60) and is not limited to £30,000.
Taking benefits using a full or partial UFPLS will trigger the MPAA.
Both the AA and MPAA are based on contributions made in the relevant Pension Input Period (PIP). Where the MPAA is triggered part-way through a PIP it will only apply to contributions made after the trigger. It is therefore possible to minimise the effect by careful timing of the first withdrawal.
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.