The Advantages & Disadvantages of Taking Lump Sums From Your UK Pension
Uncrystallised Funds Pension Lump Sums
You can leave your money in your current UK Pension fund and take lump sums when you need to. This is named ‘uncrystallised funds pension lump sums’, or UFPLS. They are uncrystallised because you haven’t moved the money out of the pot and into another product, such as income drawdown or an annuity.
Your UK Pension can be used a similarly like a savings account at a bank. You take cash out when you need to, while the rest continues to grow. The initial 25% of any withdrawal is tax-free; the rest incurs income tax at your normal rate, taking into account if you are still earning an income from working this may well be at 40%.
You can elect for UFPLS only if you’ve not already taken any tax-free cash or income from your fund.
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 at the 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 may run out of money before you die.
Advantages:
* 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, such as if there is an emergency
Disadvantages:
* 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 your pension