What Is UFPLS and Why Should You Know About It Before You Touch Your Pension?

Uncrystallised Funds Pension Lump Sums, commonly called UFPLS,is a retirement option that allows you to take lump sums from your pension once you hit pension age – currently 55 but is increasing to 57 on 6 April 2028.

With an UFPLS, you’ll receive 25% tax-free and the rest is taxable at your usual tax rate.

After you make a withdrawal using UFPLS, the rest of your pension pot remains invested.

For example:

• You have a pension worth £450,000
• You decide to take £50,000 as an UFPLS leaving £400,000
• 25% (£12,500) of the payment is tax free
• 75% *£37,500) of the payment is taxed like your normal income
• £400,000 remains invested in your pension

Flexibility accessing your pension, including receiving an UFPLS payment, will trigger the Money Purchase Annual Allowance (MPAA).

The MPAA is the yearly limit on how much can be paid into your pension and still be eligible for tax relief.

Once you take an UFPLS your annual allowance of £60,000 will be reduced to £10,000 per tax year when you pay into a pension.

Contributions above the MPAA will be taxed at your normal tax rate.

Some of the advantages of UFPLS to consider include:

• Flexibility: you can take lump sums from your pension when you want to after hitting pension age
• Compounding: your remaining pension pot has the opportunity to benefit from compound interest
• Time: using UFPLS gives you more time to decide how to manager your retirement income, for instance purchasing an annuity or going into pension drawdown

Some of the drawbacks of UFPLS to consider include:

• Complexity: the rules around UFPLS are complicated so it’s important to weigh up the impact on your retirement income before starting
• Longevity: taking money out of your pension means that you could have insufficient savings for later life
• Tax: taking large UFPLS withdrawals could trigger higher rates of tax on your income.

UFPLS can offer a short term strategy if you need flexibility to take money from your pension and are still deciding your long term plan.

However the rules are complex and it’s important to understand how it affects your other taxes and allowances before considering it as an option.

If you’re unsure, speaking with a pensions specialist or financial adviser can help review your financial circumstances and find the best option.