Uncrystallised funds pension lump sums (UFPS) explained

What is an uncrystallised funds pension lump sum?

The 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.

How UFPLS works 

An UFPLS payment is only available from uncrystallised money purchase funds. Individuals have the flexibility to take either a single UFPLS payment or multiple payments over time. Additionally, UFPLS can be paid in cases where a pension scheme does not offer a drawdown facility. 

The structure of a UFPLS payment is such that 25% of the amount withdrawn is tax-free, up to the permitted maximum, while the remaining 75% is taxed as income. After a UFPLS withdrawal, any uncrystallised funds left in the pension pot remain invested. However, making frequent UFPLS withdrawals could potentially reduce retirement savings more quickly than anticipated. 

Taking a UFPLS always triggers the Money Purchase Annual Allowance (MPAA), which can limit future pension contributions. In contrast, drawdown arrangements only trigger the MPAA when taxable income is actually withdrawn. 

Eligibility rules for UFPLS

The following conditions must be met before a UFPLS can be paid. 

Age requirements 

UFPLS is usually available once the individual reaches age 55, although this minimum pension age will increase to 57 from 6 April 2028. Earlier access is possible if the individual qualifies for ill‑health retirement or has a protected pension age under their scheme rules.  

Allowance requirements 

To take a UFPLS, the individual must have sufficient lump sum allowance and lump sum and death benefit allowance available. While the amount withdrawn can exceed the remaining allowance balance, the tax‑free portion of the UFPLS is capped at the permitted maximum, which is the lower of the two allowances. Any excess over this permitted maximum is taxable as pension income.  

Fund type 

A UFPLS can only be paid from uncrystallised money purchase funds. It cannot be paid from funds that have already been crystallised, such as drawdown funds. Nor can it be paid from disqualifying pension credits that arise from crystallised funds under a pension sharing order, because these do not provide any entitlement to tax‑free cash.  

Protection rules 

Where an individual has enhanced protection but no entitlement to greater than 25% tax-free cash, the maximum amount of UFPLS is limited to the amount that could have been paid on 5 April 2024. 
 
It is not available if: 

• The individual has valid enhanced protection immediately before the lump sum is paid, with or without dormant primary protection, and they also have protection for lump sum rights which exceeded £375,000 on 5 April 2006.
• The individual has valid primary protection immediately before the lump sum is paid and they also have protection for lump sum rights which exceeded £375,000 on 5 April 2006. 
• The funds are from a disqualifying pensions credit from a pension sharing order. This is a pension credit that has come from crystallised funds and no tax-free cash is payable. 

How is an UFPLS taxed?

An UFPLS is not the same as tax-free cash (pension commencement lump sum).

This means the option can be offered by schemes which don’t offer a drawdown option, but it also has tax consequences.

Payment of an UFPLS is tested against both the lump sum allowance and the lump sum and death benefit allowance. The individual must have available lump sum allowance and lump sum and death benefit allowance.

The UFPLS is taxed as follows:

• 25% is not liable to tax, that is, it is paid tax-free unless the first 25% exceeds the "permitted maximum".
• 75% is taxed as pension income in the same way as a pension paid under a registered pension scheme. 

The permitted maximum is the lower of:

• the individual's available lump sum allowance
• the individual's available lump sum and death benefit allowance

If the first 25% of the UFPLS is more than the permitted maximum, the amount by which it exceeds the permitted maximum is taxed as pension income at the individual's marginal rate. This is the case even if the individual has scheme specific tax-free cash protection.

UFPLS vs drawdown 

When UFPLS may be suitable 

• The scheme does not offer drawdown, but lump‑sum access is needed. 
• The individual wants occasional lump sums without setting up drawdown. 
• The individual does not intend to contribute further, so triggering the MPAA is not an issue.
• The client prefers a simpler withdrawal route. 

When drawdown may be suitable

• The client wants control over ongoing income and investments.
• They want to avoid triggering the MPAA, taking only tax‑free cash initially.
• Phased crystallisation is required to make use of personal allowances or manage tax risk. 
• Drawdown supports more detailed retirement planning. 

Key differences at a glance 

Case studies

There are several different ways to take money out of a pension fund. But depending on the route chosen, the age of the individual, the tax implications and impact on future pension savings will be different. Benefits don’t have to be taken in one go; they can be taken in phases. Let’s take a closer look at this.

Tax-free cash only

One way of taking money out of a pension plan a bit at a time is to take 25% tax-free cash and move the remaining 75% into an income drawdown plan. With flexi-access drawdown the money purchase annual allowance isn’t triggered when you take the initial 25% tax-free cash; it’s only when the first income withdrawal is taken from the remaining 75%. 

It’s worth remembering not all pension plans can support income drawdown. This is especially the case with older plans. If that's the case, and the individual would like to go into income drawdown, they need to transfer to a plan that offers this before crystallising benefits. 

Partial benefits

Another option is to take tax-free cash gradually. Every time money is taken from the pension plan, 25% of it is tax-free and tax is payable, at the recipient’s marginal rate of income tax, on the other 75% of payment. The money purchase annual allowance is triggered by the first payment of income benefits. 

Case study one

• working
• higher rate taxpayer

In this example Nabeel, aged 55, lives in England and is a higher rate taxpayer. He requires £20,000 for home improvements. 

He is still working and funding his pension and is at the age where due to his work experience his earning potential is high. In turn, his pensions contributions are significant and will also increase. He is currently paying £6,000 a year into his employer's money purchase pension plan, his employer matches this amount, so a total of £12,000 a year is being paid in. He also has another pension plan of £380,000 that is not being paid into.

Partial/phased drawdown

He can transfer the £380,000 fund into a plan that offers drawdown. He crystallises £80,000 giving him £20,000 (25%) tax-free and designates £60,000 into drawdown. He doesn't need an income just now as he has enough to live on from his salary. As no income is taken this does not trigger the money purchase annual allowance. This allows him to contribute as normal into his workplace pension and not be restricted to contributions of £10,000 a year before there is an annual allowance tax charge. No income tax is payable as he doesn't need an income from the pension savings now. The house value will increase due to the extension and increases his estate for inheritance tax purposes, but the £360,000 left over is still in the pensions ‘tax wrapper’ keeping it outside his estate for inheritance tax. Note that the government are bringing pension savings into scope for IHT from 6 April 2027.

• Income withdrawals from a flexi-access drawdown pension trigger the money purchase annual allowance.
• All the payments made in excess of the tax-free cash are taxable via PAYE.
• Unused funds stay invested and therefore subject to investment risk.
• There is a possibility that he could deplete the entire fund leaving him with insufficient funds to live on in retirement.

Uncrystallised fund pension lump sum

He can take a partial uncrystallised fund pension lump sum from the plan. This will trigger the money purchase annual allowance, which will restrict future pension contributions to £10,000 a year or there will be an annual allowance tax charge. Because part of the payment is taxable income, Nabeel must crystallise more than the £20,000.

In this case it makes sense for Nabeel to use phased drawdown rather than an uncrystallised fund pension lump sum.

Case study two

• retired
• non-taxpayer

In this example Nabeel is now aged 65, he still lives in England and will be a basic rate or non-taxpayer in the next tax year after he retires. He needs £20,000 to convert his garage so he has room for his new hobby in retirement. 

In April of the tax year after he stopped working, he has no earnings to use up his personal allowance. He moves his workplace pension into drawdown so he can take some income and will phase this so he can utilise his personal allowance each year.

An uncrystallised fund pension lump sum is an option as he has no intention of paying into a pension so the money purchase annual allowance restriction on the level of contributions does not affect him.

¹ Emergency tax code will normally apply resulting in an initial overpayment of tax; the calculations above shows the position once Nabeel has received his overpayment from HMRC. Nabeel’s full personal allowance (currently £12,570) will be used when his uncrystallised fund pension lump sum is paid, meaning only £2,859 will be liable to basic rate income tax.

Case study 3

• Uncrystallised fund pension lump sum, drawdown, scheme specific tax-free cash and the strange case of the permissive statutory override. 

Jim and Andy were co-owners of a company which they have just sold at the very end of the tax year. They have a fully insured small self-administered scheme (SSAS). Jim is 65 years old and has a £1,200,000 fund with a scheme specific tax-free cash entitlement of £660,000. Andy is 55 years old and has a fund of £120,000 and is entitled to 25% tax-free cash. Jim is intending on retiring. Andy is looking to start a new business; he has a significant amount of money from the sale of the business but needs some funds to support himself whilst his new company starts. 

What are the options?

Jim’s protected tax-free cash entitlement is £660,000 and he wants to keep this. He could take his benefits from the SSAS but it doesn’t offer drawdown. He doesn’t want to buy an annuity as he wants to pass on any unused pension to his children.

One option would be to block transfer from the SSAS with Andy to a personal pension that allows drawdown. This would protect the scheme specific tax-free cash and give him the option to leave his remaining benefits invested within a pension wrapper. He would have to take the full amount of scheme specific tax-free cash at the same time. If he phased benefits, he would revert to a maximum 25% tax-free cash.

Andy needs his cash quite urgently and doesn’t really want to go through and pay for the advice process to transfer to a new arrangement only to take the whole fund as an uncrystallised fund pension lump sum. He’s not concerned the money purchase annual allowance will apply to him as he intends on using the sale of his new business to fund his retirement. Nor does he have scheme specific tax-free cash protection which would be lost if he takes his benefits as an uncrystallised fund pension lump sum.

As they are the only scheme members, and they are trustees of the SSAS, they can decide to make use of the permissive statutory override that was brought in from April 2015. This allows the trustees to offer pension flexibility without updating the scheme rules.

Taking the benefits

Andy

As the SSAS can now offer flexible benefits Andy can be paid an uncrystallised fund pension lump sum immediately. He will get £30,000 tax-free cash and the remaining £90,000 will be taxed at emergency rate. He’s got no other income in this tax year. Emergency rate tax is applied irrespective of where you live in the UK.

Under the emergency tax code, the amount being withdrawn is treated as if it will continue to be paid each month. Although in many cases it will actually be a one-off payment – known as the 'Month 1' basis.

The provider will therefore apply 1/12th of the personal allowance to the payment and will assess the remaining payment against 1/12th of each of the income tax bands currently in force.

Jim

Jim needs to take his full scheme specific tax-free cash of £660,000 in one go otherwise the tax-free cash will reduce to 25%. Using the permissive statutory override, he can then transfer his remaining funds to a drawdown provider as a transfer in drawdown.

Triviality

UFPLS replaced triviality for money purchase arrangements and is not limited to £30,000. Our Trivial commutation lump sums article tells you more.

Does UFPLS trigger the money purchase annual allowance (MPAA)?

Yes. Taking benefits using a full or partial UFPLS triggers the MPAA. For more information, give our money purchase annual allowance article a read.

Where the money purchase annual allowance is triggered part-way through a pension input period 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.