Uncrystallised funds pension lump sum

These FAQ are for financial advisers only. They mustn’t be distributed to, or relied on by, customers. They are based on our understanding of current legislation, which may change.

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One of the most notable changes brought in on 6 April 2015 was the introduction of a new authorised payment called an ‘uncrystallised funds pension lump sum’ (UFPLS). It is notable both for the mouthful it is to say and for the fact that it introduced a lump sum alternative to annuity purchase for many people.

An UFPLS can be paid from uncrystallised money purchase funds as a lump sum – there is a 25% tax-free element and the balance is taxed at the member’s marginal rate of tax.

Members (if their scheme allows) can take their entire money purchase pot as an UFPLS in one go, or take a series of smaller UFPLSs, each of which will have a 25% tax-free element. Media reports have likened this to using a pension as a bank account. The reality though is more complex. Here we look at the rules for payment of an UFPLS.

To be an UFPLS:

  • The lump sum must be paid on or after 6 April 2015 from uncrystallised funds in a money purchase arrangement.
  • The member must have at least some of their lifetime allowance available, and if the UFPLS is paid before reaching age 75 the full amount of the payment must be covered.
  • The member must be at least age 55 (or protected pension age, if they have one under the arrangement) or meet the conditions to take benefits early under the ill-health rules.

A member can’t have an UFPLS:

  • If they have enhanced and/or primary protection together with registered tax free cash of more than £375,000, immediately before the lump sum is paid.
  • From an arrangement that contains a disqualifying pension credit (that is a pension credit on divorce that originates from previously crystallised funds).
  • If the member has a lifetime allowance enhancement factor on their pension benefits and the available lump sum would be less than 25% of the proposed amount of the UFPLS. A member can have an enhancement factor if they have primary protection or, for example, where funds originated from a pension share on divorce, from funds built up during a period of non-UK residence or from a transfer in from a recognised overseas pension scheme.

The last two conditions prevent members from accessing a tax-free payment under an UFPLS that is greater than that which would have been allowed as a pension commencement lump sum (PCLS).

It’s worth noting that an UFPLS is unlikely to be attractive to people who have ordinary (also known as ‘scheme-specific’) tax-free cash protection, as the maximum tax-free element that can be paid from an UFPLS is 25% of the UFPLS fund.

If the UFPLS is taken before age 75, 25% of it is tax free, and the balance (up to the member’s available lifetime allowance) is taxed as pension income at the member’s marginal rate of tax. (Note, the tax free element is not a PCLS). If the proposed UFPLS exceeds the member’s available lifetime allowance, the excess is paid as a lifetime allowance excess lump sum and is taxed at 55%.

Where the UFPLS is paid on or after age 75, 25% will be paid tax-free so long as the individual has enough lifetime allowance available to cover the full lump sum. If the member doesn’t have enough lifetime allowance left, only 25% of the available lifetime allowance is paid tax-free and the balance is taxed as pension income.

Where an UFPLS is paid before age 75, it’s tested against the member’s remaining lifetime allowance under BCE6. Where it’s paid after age 75, there’s no BCE, because the test against the member’s lifetime allowance will have already been done at age 75 under BCE5b. A BCE statement will be issued every time a member takes an UFPLS.

The first time a member accesses their pension benefits flexibly, which will include taking an UFPLS, they will trigger the money purchase annual allowance of £10,000. This will need to be considered carefully when deciding whether or not to take benefits as an UFPLS. More information can be found in our Money Purchase Annual Allowance FAQs. 

Pensions Technical Services