Money down the drain

Drawdown vs UFPLS


Since 2006, there have been a lot of changes to UK pensions and especially the terminology, Flexi-access drawdown and the Uncrystallised Funds Pension Lump Sum are examples.

Drawdown

April 2015 introduced the latest terms and so let’s look at them in more detail.

Uncrystallised Funds Pension Lump Sum (UFPLS) 

In a nutshell, this allowed people to access their pensions without having to take a regular income  via drawdown or buy an annuity. Before April 2015 accessing an Uncrystallised Funds Pension Lump Sum could have led to large tax bills!

Basically, this allows full access to the untouched part of a pension ( if over 55 ), provided the pension company offers it. If not, advice on an alternative scheme would be required.

How is an Uncrystallised Funds Pension Lump Sum taxed now?

From 6th April 2015, if a client wants to access some or all of their money purchase pensions savings without designating funds as available for drawdown or buying an annuity , then UFPLS allows this

  • 75% of the lump sum is taxed as if it were an instalment of pension and only the remaining 25% is tax-free.
  • Each amount paid as an UFPLS will have 25% of the sum paid “tax-free” and the remainder will be taxable as pension income.

Note the tax on the lump sum and residual 75% will depend on the Double Tax Treaty with the UK and the residency of the investor.

Drawdown  or  Flexi-access Drawdown (FAD)

Flexi-access Drawdown Pension replaced Flexible Drawdown from  April 2015.

By utilizing the new Flexi-access Drawdown Pension, someone can crystallise their pension fund and take 25% of the pension fund as a Pension Commencement Lump Sum (PCLS)- possibly tax free.

The other 75% remains invested. Now, the investor can draw as much or as little of the crystallised fund as they desire (no limits as before ). Withdrawals can be taken as a regular income stream, or one or more lump sums. Income tax will be chargeable on any withdrawals, at the pensionholders’ marginal rate in the year of withdrawal.

 

Which is better? Flexi-access Drawdown (FAD) or Uncrystallised Funds Pension Lump Sum (UFPLS) 

The answer depends on your circumstances. A good adviser will consider both with the target of achieving the most cost effective, tax efficient way to provide the income their client needs in retirement.

Do QROPS offer Flexi-access Drawdown (FAD)?

Only those QROPS  based in the EU. Fees, tax and residency need to be taken into account before an expat moves from this extremely generous and flexible new UK regime.

 

The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not except any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.

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