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UFPLS or Drawdown: What’s the Best Retirement Strategy?

Pensions / At Retirement Planning

UFPLS and Flexi Access Drawdown are two terms often used in the financial world. The terms were introduced following pension freedom legislation in 2015. In this article, we’ll compare Ufpls vs Drawdown and explain the differences. We cover the advantages and disadvantages of each.

We recommend speaking to us as it is a complicated aspect of retirement planning.

What is UFPLS?

UFPLS lets you take a lump sum from your pension. Some older schemes may not offer it, so check with your provider.

This option is used by retirees that require a large lump sum from their pension arrangement. Usually, the whole of the pension fund is encashed and paid to the retiree. Retirees that require the whole of their fund choose this option.

UFPLS is a great option if you require a large sum of money for a significant purchase. Examples include paying off a mortgage or buying a house. But, it can affect your retirement money and you might have to pay taxes.

Under UFPLS, you can take a tax-free lump sum. This is called pension commencement lump sum(PCLS). A 25% tax-free cash lump sum is available.

You can take this from age 55. However, the minimum retirement age is changing to 57 from 2028. You should consider how much you take, as it will affect your future retirement income. The remaining 75% of the pension fund will be taxable as income.

Case Study

  • Client A has a pension fund of £200,000. They also earned an income of £60,000.
  • A decides to take the whole of the pension fund as UFPLS
  • £50,000 is paid tax-free (PCLS)
  • The remaining £150,000 is added to their £60,000 income.
  • This means that their taxable income would be £210,000
  • Making them an additional taxpayer at a rate of 45%

What is Flexi Access Drawdown?

Drawdown is another way of accessing pension funds in a tax-efficient way. It allows investors to access their pension funds in multiple payments over time. The remaining pension fund stays invested.

Investors can get regular income when they retire and take lump sums when needed. But taking money from a drawdown plan can make their pension pot smaller in the future.

You will have crystallised and uncrystallised benefits when using an income drawdown plan. Crystallised refers to the part of the pension fund where you have taken benefits. The uncrystallised portion is untouched.

When you crystalise benefits, you can take up to 25% of your pension pot as a tax-free lump sum. This will be paid to you as a lump sum. You then have the option to take an income if you require it.

You can access some of your funds yearly and use tax-free cash and income. This is a good choice for those who want to use their pension money without paying too much tax. You can also take out a big amount of money when you need it. Later on, you can choose to buy an annuity if it’s right for you.

Flexi Access Drawdown Vs UFPLS

UFPLS (Uncrystallised Funds Pension Lump Sum) has an advantage over the Drawdown. UFPLS lets you take a big payment from your pension all at once. You can use it for things like paying off debt.  

However, you need to be aware of Income and inheritance taxes. Income tax will be applied at your marginal rate. This means you could end up being a 40% or 45% taxpayer for large lump sums.

When the pension fund balance is paid, the provider will apply an emergency tax code to the payment and deduct tax. You must then correspond with HMRC if entitled to a tax refund.

Also, by taking the lump sum, you could create an inheritance tax liability if you are under 75. If you’re under age 75, your pension can give tax-friendly death benefits. This means your beneficiaries get the money instead of it being part of your estate.

When to use Flexi Access Drawdown

Flexi Access drawdown (FAD) will give you more flexibility to control how and when you take your benefits. For most people, Flexi Income drawdown is the preferred option. You can even take your 25% PCLS and decide not to take any income.

Disadvantages of Income Drawdown

The main disadvantage of drawdown strategies is that retirees may be unable to access their funds while they need them. This can be especially true if the retiree experiences income fluctuations or must make large withdrawals at once. Drawdown strategies may not work for people who need a steady income from their retirement savings.

Income Tax Implications For Drawdown And UFPLS

Regarding UFPLS, your tax-free lump sum withdrawal will be subject to income tax. You should know the income tax implications when deciding how much to withdraw.

Be careful about taking too much of your pension savings as a lump sum. It could lower your retirement income later on.

You can take out a regular income from your pension pot with income drawdown plans. The tax rate is the same as your other income.

This means you can control the pension income you receive each tax year. If you get an income drawdown plan, your tax rate might be higher based on how much you earn. It’s good to control how much money you take out each year. This can help you manage your taxes better in the future.

The Impact on Future Pension Contributions

If you use the UFPLS option, then your ability to fund future pension contributions will be reduced. When you take benefits apart from the tax-free lump sums, the money purchase annual allowance (MPAA) will come into force. This means your maximum annual pension contribution will be restricted to £10,000. Also, if you are a high earner, there could be restrictions on the amount you can pay.

Conclusion on ufpls vs drawdown

Flexi access drawdown (FAD)  and Uncrystallised funds pension lump sum (UFPLS)  and Drawdown are useful planning options for retirement. Each has its advantages and disadvantages. The best option depends on your circumstances. Please get in touch with us if you would like to learn more about the best option.

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