UFPLS: lump sums from your pension
Uncrystallised Funds Pension Lump Sum
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Important: The information on our website is not personal advice but we can offer advice if specifically requested. What you do with your pension is an important decision, which could be irreversible. Taking a lump sum is a higher risk option than an annuity. Make sure you understand your options and check they are suitable for your circumstances: take appropriate advice or guidance if you are unsure. The Government's free Pension Wise service can help. It provides impartial guidance face-to-face, online or by phone - more on Pension Wise.
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The example pie-chart illustrates how a £25,000 income payment can be withdrawn and taxed via an UFPLS.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. 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.
| Drawdown versus Uncrystallised Funds Pension Lump Sum (UFPLS) | |||||
|---|---|---|---|---|---|
| Drawdown | UFPLS | ||||
| Eligibility |
Open to any investor over age 55 who wants to keep their pension invested from which to draw a variable income. They must be comfortable that the pension is invested which means future income is not secure could fall, or even run out. |
Open to almost any investor over age 55 who wants to withdraw a lump sum directly from their pension, who has not yet taken any tax-free cash or income from that part of the fund. They must be comfortable that the remaining pension is invested which means future income is not secure and could fall, or even run out. |
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| Do I have to use my entire pension fund? | No – you can move funds into drawdown in stages (known as partial or phased drawdown). | No – you can take lumps sums as and when you require income. | |||
| Will part of my payment be tax free? | Yes - usually up to 25% of the fund allocated to drawdown is paid as a tax-free lump sum. | Yes – usually 25% of the lump sum you take will be tax free. | |||
| Do I have to take an income straight away? | No – after taking your tax-free cash you can leave the remaining drawdown funds invested and take what income you like when you like. There is no minimum or maximum withdrawal limit. | You will be paid your lump sum in one go. 25% of this will be tax free and the rest taxable. If you have reached 75 and used up most of your lifetime allowance the tax-free amount could be less than 25%. | |||
| When can withdrawals be taken? |
Tax-free cash will be paid from the Vantage SIPP within 5 working days of funds being allocated to drawdown. Income payments are issued on the 28th of the month. You can choose to have income paid monthly, quarterly, half-yearly, annually, or as one-off payments. |
Lump sum withdrawals from the Vantage SIPP will be paid within 5 working days of receiving your application. | |||
| What are the charges? |
No set up charge or transfer-in charge from us. If all your funds are withdrawn an account closure fee will apply. See our new charges » |
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| What about tax? | When you decide to take income from your drawdown funds, each payment will be subject to Pay As You Earn (PAYE) income tax. | 75% of your lump sum will be subject to Pay As You Earn (PAYE) income tax. | |||
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Hargreaves Lansdown, like all pension providers, will deduct tax, where applicable, before any withdrawal is paid out. Withdrawals will be added to your income in that tax year and subject to any further income tax. Large withdrawals could result in you being pushed into a higher tax bracket. For investors first taking income from drawdown or via an UFPLS, it is likely emergency tax will be deducted, unless we are supplied with a current and original P45. If you pay too much tax you will be able to reclaim this from HMRC directly. The tax you pay will depend on your circumstances, and tax rules can change in the future. |
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The information on our website is not personal advice but we can offer advice if specifically requested. What you do with your pension is an important decision, which could be irreversible. Drawdown is a higher risk option than an annuity. Make sure you understand your options and check they are suitable for your circumstances: take appropriate advice or guidance if you are unsure. The Government's free Pension Wise service can help. It provides impartial guidance face-to-face, online or by phone - more on Pension Wise.