How do pension lump sums work?
In addition to income drawdown, there's another flexible way to take money from your retirement savings. You can leave your money in your current pension fund and take lump sums when you need to.
The unwieldy technical term for this is ‘uncrystallised funds pension lump sums’, or UFPLS.
They're 'uncrystallised' because you haven't moved the money out of the pot and into another product, such as income drawdown or an annuity.
In theory, your pension can be used a bit like a bank or a savings account. You take cash out when you need to, while the rest continues to grow.
The first 25% of any withdrawal is tax-free; the rest incurs income tax at your normal rate, taking into account the rest of your income.
You can opt for UFPLS only if you’ve not already taken any tax-free cash or income from your fund.
What are the pros and cons of pension lump sums?
- you can take as much as you like in one go
- you can spread the 25% tax-free benefit over a period of time
- you won’t expose your pension to investment risk
- you can take out chunks of money as and when the need arises, ie if there is an emergency.
- you could run out of money
- you won’t get a regular, guaranteed income
- there may be charges when you take money out and a limit to how many withdrawals you can make each year
- the money won’t be actively invested, so this will limit the chance for it to grow, and it could still fall in value
- not all pension providers allow this option, so you may have to transfer.
What is an 'UFPLS?'
Using UFPLS is flexible in the same way that income drawdown is, but your pension savings won’t be reinvested into new funds chosen to pay a regular income, which is the case with flexi-access drawdown.
Taking your fund in one go will mean taking the tax-free lump sum upfront, while the rest is taxed according to your income tax ('marginal') rate that year, whereas UFPLS are useful to help you spread out the tax burden.
UFPLS can provide a regular income, in a similar way that annuities do, though you can vary how much you take out each year. But unlike annuities, you might run out of money before you die.