Here's some questions that have been regularly asked since the pension flexibility changes were introduced on 6 April 2015. 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.05 October 2015 Back to results
A client has taken an Uncrystallised Funds Pension Lump Sum (UFPLS) of £50,000. After finding out how much tax was deducted from his UFPLS and discovering that he’ll have to pay more tax on his earnings for the tax year, he asks if he can return the money to his provider and cancel the UFPLS. Is this allowed?(Expand content) (Minimise content)
No – there are no cancellation rights for UFPLS. Once an UFPLS has been paid, there’s no way to undo this.
A client has an entitlement to more than 25% tax-free cash from his pension – can he take the remaining fund as an Uncrystallised Funds Pension Lump Sum (UFPLS)?(Expand content) (Minimise content)
No. A payment of tax-free cash can only be made where the member has an ‘actual entitlement’ to a relevant pension benefit under the same scheme. An UFPLS is a lump sum payment. It isn’t a relevant pension benefit so the remaining fund can’t be paid as an UFPLS. (Note – a relevant pension benefit includes drawdown, lifetime annuity and scheme pension).
My client is 60 and has pension savings of £15,000 in a personal pension. She wants to take the fund as a lump sum – what’s the difference between taking it as an Uncrystallised Funds Pension Lump Sum (UFPLS) or as two small pots?(Expand content) (Minimise content)
There are a number of differences. The table below highlights some of the features of both UFPLS and small pot payments:
|Triggers the money purchase annual allowance?||Yes||No|
|Maximum amount that can be paid as a lump sum when the member is under age 75||Limited to the individual’s available lifetime allowance||£10,000 per small pot|
|Maximum amount that can be paid as a lump sum when the member is age 75 or over||No limit, as the age 75 BCE will have been done and any excess charge will already have been paid.||£10,000 per small pot|
|Number of times such a payment can be made?||No limit||Maximum of 3 small pots from non-occupational pension schemes|
|Can be taken from age 55 (or a lower protected pension age) or earlier if in ill-health||Yes||Yes|
|Tax-free element||25% of the remaining lifetime allowance||* 25% if taken from uncrystallised funds |
* Nil if taken from crystallised funds
|Overall tax position||Marginal rate||Marginal rate|
While the overall tax position for UFPLS and small pots results in members paying marginal rate tax on the taxable part of the lump sum, the methods for deducting tax in practice are different. When an UFPLS is paid, 25% is normally tax free and the balance is taxed using an emergency code. Small pots from uncrystallised funds are paid 25% tax free with the balance being taxed at 20%. So those taking an UFPLS may need to reclaim tax from HMRC if they’ve overpaid, whereas members taking a small pot may have a tax liability for underpaid tax, or a claim for overpaid tax if they’re nil rate taxpayers. The end result is the same once the over/underpayment of tax is resolved.
A client took his tax-free cash in September 2014, but did nothing with the remaining fund – he must use the remaining fund before 6 October 2015 to buy an income under the transitional rules. Can he take the remaining fund as an UFPLS instead of income?(Expand content) (Minimise content)
No. The transitional rules allowed members to take their tax-free cash and delay making a decision on what type of relevant pension benefit to buy with the remaining fund. So long as a relevant pension benefit is bought before 6 October 2015, the original payment of tax-free cash will be authorised. An UFPLS is a lump sum payment, not a relevant pension benefit so the remaining fund can’t be paid as an UFPLS. (Note – a relevant pension benefit includes drawdown, lifetime annuity and scheme pension).