Uncrystallised funds pension lump sum

These FAQs are for financial advisers only. They mustn’t be distributed to, or relied on by, customers. They are based on our understanding of legislation at the date of publication

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It is an authorised payment called an ‘uncrystallised funds pension lump sum’ (UFPLS). 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. 

Conditions for payment 

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 protection (with or without dormant primary protection) 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.

Taxation 

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.

Benefit crystallisation events (BCE) 

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. 

Reduction in the annual allowance

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. If you want to find out more about the MPAA rules, please refer to our FAQs on the ‘Money purchase annual allowance’. 

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).

There are a number of differences. The table below highlights some of the features of both UFPLS and small pot payments:

Feature UFPLS Small pot
BCE? Yes (BCE 6) No
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.

Pensions Technical Services