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Withdrawing money from a pension - which option might you choose?
Drawdown and UFPLS have been the two most popular alternatives to taking an annuity since the pension freedoms were introduced in April 2015. Russell Wright looks at both options to help you decide.
Important notes
This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.
Since April last year, the two most popular alternatives to taking an annuity have been drawdown and Uncrystallised Funds Pension Lump Sum (UFPLS). Between April 2015 and January 2016 a staggering £4.2bn was invested in drawdown and over 213,000 lump sum withdrawals were made from insurance company pensions alone*.
Both options allow investors to flexibly access their pension from age 55 (57 from 2028). However, there are some important distinctions between drawdown and UFPLS that investors must consider when deciding which option is better for their circumstances.
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Drawdown vs UFPLS – a quick comparison
| Drawdown | UFPLS | |
|---|---|---|
| Consider this option if . . . | . . . you want to keep the pension invested and draw a variable income from it. You must be comfortable that the pension is invested which means future income is not secure and could fall, or even run out. | . . . you want to withdraw a lump sum directly from the pension, and have not yet taken any tax-free cash or income from that part of the fund. You must be comfortable that the remaining pension is invested which means future income is not secure and could fall, or even run out. |
| Is income secure? | No – if you want a secure income, consider an annuity. | No – if you want a secure income, consider an annuity. |
| Can I take part of the fund tax free? | Yes - usually up to 25% of the fund you are using for drawdown is paid as a tax-free lump sum at the start. | Yes – usually 25% of each lump sum you take will be tax free. |
| How do I take the rest? | 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. Usually 25% of this will be tax free and the rest taxable. The remaining fund stays invested. |
| 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 lump sums as and when you require. |
| Do you retain control over the pension and so need to review regularly? | Yes. | Yes. |
| Do you need to decide on the death benefits at the start? | No – you can keep your options open. | No – you can keep your options open. |
How your withdrawals are taxed
In drawdown, you can usually take up to 25% of the money moved into drawdown as a tax-free lump sum. Future withdrawals are subject to income tax.
UFPLS payments work differently: each time 25% of the payment will usually be tax-free and the rest taxed as income.
Which option you decide on will depend on your circumstances Drawdown would allow you to access all the tax-free cash from your pension without requiring you to take the rest as taxable income right away. Doing the same with UFPLS could have significant tax implications. If you accessed all of your tax-free amount with an UFPLS payment, the rest of your pension, which is taxable, would be paid out too – depending on the size of your pension, this could make you a top rate tax payer (45%) overnight. Tax rules can change and any benefits depend on individual circumstances.
If you just want to access part of your tax-free amount, either option can be used. You could move part of your pension into drawdown and take the tax-free cash from that portion. With UFPLS you could take a partial payment from your pension, 25% of which would usually be tax free and the rest taxable. With both options the remaining pension stays invested for you to access at a later date.
Learn more about how drawdown works
You can withdraw up to your entire pension pot via drawdown or UFPLS, but when withdrawing large amounts it is important to consider the tax implications. Also remember to think about the long term implications for your lifestyle; taking large lump sums now will mean you have less in the pension later on in retirement.
Calculate how much tax you could pay
How you take your income
Once you have moved your pension into drawdown you can start receiving regular income as well as requesting one-off payments. If you aren’t ready to start taking an income from your pension you don’t have to, you can simply take your tax-free cash and provide income instructions when you are ready.
Find out more about how drawdown works in the Vantage SIPP
UPFLS in the Vantage SIPP is designed for investors who want to take one-off payments from their pension. This leaves the rest of the pension untouched. Each withdrawal needs to be requested separately.
Find out about UFPLS in the Vantage SIPP
The risks involved with both
Whether you are using drawdown or taking UFPLS withdrawals, the remaining pension stays invested. This means the fund value and any future income is not secure.
Keeping the fund invested does create the potential for growth but your income and fund value could reduce or even run out if you take too much out, investments perform badly or you live longer than expected. Investors who are looking for a secure income for life should consider an annuity.
Find out more about annuities and get a quote
There are ways to reduce the risk of your pension running out. For example, you could decide to only withdraw the income your investments produce (known as taking the “natural yield”) to leave the capital element of the pension untouched. Keeping a cash buffer of 1 or 2 years’ worth of planned income payments, so you don’t need to sell investments to fund withdrawals when the time isn’t right, could also help.
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Taxation on death
There’s no difference between drawdown and UFPLS here. The tax that applies to the remaining pension fund on death depends on the age of the investor when they die. If under age 75 the pension can usually be passed on tax free. If age 75 or older, the beneficiaries will pay income tax on the income or lump sum taken.
Download our factsheet: What happens to your pension when you die?
What help can you get?
What you do with your pension is an important decision. Therefore, we strongly recommend you understand your options and check any decision you make is suitable for your individual circumstances - take appropriate advice or guidance if you are at all unsure.
The government's Pension Wise service can help. Pension Wise provides free impartial guidance on your retirement options face-to-face, online or over the phone - more on Pension Wise »
This article is not personal advice. We offer a range of information to help you plan your own finances and personal advice if requested.
The free guides and factsheets mentioned in this article should help you to understand your options. If you have any questions you can always call us on 0117 980 9940 (Monday to Thursday 8am – 7pm, Friday 8am – 6pm and Saturday 9:30am – 12:30pm), you will speak to a real person who will answer your questions in plain English.
*Source: Association of British Insurers
Important notes
This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.
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