UFPLS: lump sums from your pension
Uncrystallised Funds Pension Lump Sum
Important information: What you do with your pension is an important decision that you may not be able to change. You should check you're making the right decision for your circumstances and that you understand your options and the risks. Taking a lump sum is a higher risk option than an annuity. The government's free and impartial Pension Wise service can help you and we can offer you advice. The information on our website is not personal advice.
What is a lump sum withdrawal?
The pension freedoms introduced in April 2015 mean investors can take lump sums directly from their fund, from age 55. This is also known as taking an Uncrystallised Funds Pension Lump Sum (UFPLS).
Each time you take an UFPLS from your pension, 25% will be tax free and the rest taxed as income. If you have reached 75 and have insufficient lifetime allowance the tax free percentage will be lower.
The example pie-chart illustrates how a £25,000 income payment can be withdrawn and taxed via an UFPLS. More detailed information about tax treatment can be found below.
Why take lump sums?
There is no requirement to take a pension all in one go. Deciding whether to withdraw your income over time rather than in one go is an important consideration, and can affect the amount of tax you pay.
Those who don't need their full tax-free cash yet, nor a regular income from their pension, may wish to take periodic lump sums out as they wish.
The remaining pension stays invested, which means the fund value and future income is not secure. Keeping the fund invested does create the potential for growth but taking lump sums out will reduce what is left to provide income in future, particularly if your investments perform badly or you take too much out. There are tax advantages in keeping funds within a pension, and the fund usually stays outside your estate for inheritance tax purposes.
Why use Hargreaves Lansdown for UFPLS?
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How are lump sum withdrawals taxed?
Your pension provider will deduct tax, where applicable, before a withdrawal is paid out. Remember in most cases 25% of the UFPLS will be tax free and the rest taxed as income.
Tax rules can change and benefits depend on your circumstances.
The taxable income will be added to any other income received in that tax year, so taking high withdrawals could push you into a higher tax bracket. See the table to the right for an example of the tax treatment of a £1,000 UFPLS payment.
When you first take a taxable lump sum or income from a pension, it is likely that emergency tax will be deducted. Emergency tax will apply to future withdrawals until HMRC send your correct tax code directly to your retirement provider. More tax may be deducted than you owe, in which case you would need to reclaim this from HMRC directly.
What happens to my pension when I die?
If you die before age 75 any funds remaining in your SIPP can be paid to your beneficiaries, tax free in most cases. For death on or after 75 any benefits paid out will be taxed as income at your beneficiary's marginal rate.
| Tax treatment of a £1,000 UFPLS withdrawal | |||||
|---|---|---|---|---|---|
| Basic-rate tax | Tax deducted | £150 | |||
| Net payment | £850 | ||||
| Higher-rate tax | Tax deducted | £300 | |||
| Net payment | £700 | ||||
| Additional-rate tax | Tax deducted | £337.50 | |||
| Net payment | £662.50 | ||||
These figures are an estimate only, and assume the whole payment falls within one tax band. If you’re a Scottish taxpayer different rates and bands will apply. They do not take into account the effect on any means tested benefits (e.g. child benefit) or any other impacts such as personal allowance or the nil-rate savings band.
What happens to my pension when I die?
If you die before age 75 any funds remaining in your SIPP can be paid to your beneficiaries, tax free in most cases. For death on or after 75 any benefits paid out will be taxed as income at your beneficiary's marginal rate.
Anything else to consider?
- Ensure you fully understand your options. UFPLS via the Vantage SIPP is offered without personal advice as standard. If you are at all uncertain about its suitability for your circumstances, we strongly suggest you contact us for advice. You should carefully consider your overall financial circumstances and other retirement goals or plans when making your decision. Remember, Pension Wise the government’s free impartial service is available to help you understand your options.
- Consider the charges you might pay. Most investments carry charges, and the income you ultimately receive depends on the returns from investments, less any charges. Therefore it is important you consider the charges of your pension plan as well as those of any of the other options you are considering. See the charges of the Vantage SIPP.
- Investment scams do exist. Once money is drawn from a pension, you should be careful where you re-invest it. These scams tend to be carried out by firms which are not regulated and warning signs include cold calling or texting, the promise of unique or unusual opportunities offering quick, easy profits or something which seems too good to be true. You can find out more at www.scamsmart.fca.org.uk
| Drawdown versus Uncrystallised Funds Pension Lump Sum (UFPLS) | |||||
|---|---|---|---|---|---|
| UFPLS | Drawdown | ||||
| Why might you consider this option? |
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| Do I have to use my whole pension? | No – you can take lumps sums as and when you require income. | No – you can move funds into drawdown in stages (known as partial or phased drawdown). | |||
| What decisions do I need to make at the start? |
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| How will income be taxed? | Usually 75% of each lump sum will be subject to Pay As You Earn (PAYE) income tax. | When you decide to take income from your drawdown funds, each payment will be subject to Pay As You Earn (PAYE) income tax. | |||
| Will future contributions be restricted? | Flexibly accessing benefits via an UFPLS or drawdown can affect your future pension contributions by triggering the money purchase annual allowance (MPAA). Once triggered, contributions into SIPPs and other money purchase pensions will be restricted (to £4,000 per tax year). This will be triggered: | ||||
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| What happens to the pension when I die? | If you die before age 75 any remaining funds can be paid to your nominated beneficiaries, tax free in most circumstances. If you die at or after age 75 income paid to your beneficiaries will be taxed at their rate of income tax. Find out more about what happens to your pension when you die. | ||||
What you do with your pension is an important decision that you may not be able to change. You should check you're making the right decision for your circumstances and that you understand your options and the risks. Taking a lump sum is a higher risk option than an annuity. The government's free and impartial Pension Wise service can help you and we can offer you advice. The information on our website is not personal advice.