UFPLS v Drawdown

Malthusian

tacpot12 wrote: »

While Malthusian is correct that UFPLS doesn't allow you to take the full tax free lump upfront, this means that UFPLS should be the default approach to draw down for anyone who doesn't need a lump sum.

There's far too many variables to talk about a default option. Someone who has already used all of their personal allowance may want to take only tax free cash and no income on which they'd have to pay tax.

Same goes for anyone who might want to pay contributions in the future - taking taxable income (including UFPLS) means the Money Purchase Annual Allowance kicks in, taking tax free cash only means it doesn't.

Using drawdown they can partially crystallise and take as much tax free cash as they need to spend as "income" while drawing no taxable income.

Flexi-drawdown is LESS flexible than UFPLS because with Flexi-drawdown you might be bringing forward the crystallisation of benefits earlier than you need to and once you have done this it becomes irreversible.

Not true. Everything you can do with UFPLS you can do with flexi-access drawdown, including partial crystallisation. The same isn't true in reverse.

sandsy

UFPLS lets you spread taking the tax free element without having to crystallise your funds. I personally think it’s misunderstood and under rated by many who don’t seem to see the tax management of income when consumers don’t want or need a full PCLS immediately. No reason why, in theory, you can’t take UFPLS payments monthly.

coyrls

As explained, flexi-drawdown crystallisation can be phased; there is no requirement to take a full PCLS immediately with a phased flexi-drawdown. You can do exactly the same with phased flexi-drawdown as you can with UFPLS but you have other options with phased flexi-drawdown that you don't have with UFPLS.

lollynerd

Thank you Malthusian and Coyrls.
You have cleared up and confirmed what I thought.

Too many people (including pension companies) confuse the matter by explaining the UFPLS phased withdrawal without pointing out that FAD offers the same.

coyrls

lollynerd wrote: »

Thank you Malthusian and Coyrls.
You have cleared up and confirmed what I thought.

Too many people (including pension companies) confuse the matter by explaining the UFPLS phased withdrawal without pointing out that FAD offers the same.

Some companies may not offer the full flexibility of a phased flexi-access drawdown; you would need to check what is available and possibly transfer to a different company/platform if they can't offer what you require.

shinytop

Say I had a DC fund of £100k. £75k is taxable and £25K is tax free. I have just retired, have no income and need £15k to live on. Could I take £11850 from my taxable £75k (but pay no tax) and £3250 from my tax free £25k? Then next year when my £10k DB pension starts, I only need £5k. Could I take £5K from my tax free remainder? Or maybe as a £6250 UFPLS? What I’m asking is, can the tax free and taxable ‘pots’ effectively be treated separately and drawn down to minimise tax according to my situation in a given year?

dunstonh

Too many people (including pension companies) confuse the matter by explaining the UFPLS phased withdrawal without pointing out that FAD offers the same.

call centre staff are limited on what they can and cant say. Plus, most legacy pension plans dont support all the options. Plus, some say they support drawdown but only support UFPLS or just the 25% TFC being paid. They may not support income drawdown or phased flexi-access drawdown. The latter is not fully supported by all modern plans either.

Malthusian

shinytop wrote: »

Say I had a DC fund of £100k. £75k is taxable and £25K is tax free. I have just retired, have no income and need £15k to live on. Could I take £11850 from my taxable £75k (but pay no tax) and £3250 from my tax free £25k?

No.

You would need to crystallise £15,800 (11,850 / 75%), either via UFPLS or drawdown, to generate £11,850 of taxable income. This means taking £3,950 tax free cash (15,800 x 25%).

Then next year when my £10k DB pension starts, I only need £5k. Could I take £5K from my tax free remainder? Or maybe as a £6250 UFPLS?

Yes, you can take £5,000 tax free cash on its own, with no taxable income. This would involve crystallising £20,000 of your pension - the other £15,000 would be designated to drawdown.

Why a £6,250 UFPLS? £6,250 UFPLS means £1,562.50 tax free and £4,687.5 taxable. That's £14,687.50 total taxable income which, assuming no other income, gives you £14,120 net. £14,120 net plus £1,562.50 tax free is £15,682.50, so you have overshot your requirement.

What I’m asking is, can the tax free and taxable ‘pots’ effectively be treated separately and drawn down to minimise tax according to my situation in a given year?

No. Hopefully the first example illustrates how tax free cash is tied to the taxable income. You can take tax free cash without taking taxable income but your options are more limited the other way around. To simplify massively, to generate X in taxable income from a currently uncrystallised pension you have to take at least X/3 in tax-free cash. But you can generate X in tax-free cash without taking any taxable income.

You can of course just put the surplus tax free cash into ISAs or other investments. In the above examples you could even put it back into a pension - people without any earned income can contribute £2,880 net and still get tax relief, and tax-free cash recycling rules won't apply as the numbers are too small.

MK62

There is sometimes a cost element too.......many providers will charge half the fee for a UFPLS than they will with flexi-access drawdown.
UFPLS is also a one-off fee - once you go into flexi-access drawdown you might then be charged annually, whether you make any withdrawals or not, and you may be charged for each crystallisation event on top of that - it all depends on the platform/provider.
Those with HL or Fidelity for instance pay no extra fees for either option (though you could argue you've already paid upfront).
With iWeb, for instance, you pay £90 for each UFPLS, but once you put any funds into drawdown, it's £180pa, plus £90 for each subsequent crystallisation event.

In that case, while you could mimic UFPLS with phased flexi-access drawdown, the UFPLS route would cost £90pa (assuming one withdrawal per year) whereas the flexi-access drawdown would cost £180 in the first year and £270pa in subsequent years (again assuming one crystallisation event/withdrawal per year). Not massive amounts in the grand scheme I suppose, but still.......

So, as was said by a previous poster, there is no one-size-fits-all "best" option, just the best option in each individual case.

coyrls

[FONT=&quot]A further complication that I’ve come across is that even when flexible options are available, the standard forms that have to be filled in to start flexi-access drawdown only cater for the simple case of a fixed monthly withdrawal. I take a variable amount annually and have to write to my platform each time I want to make a withdrawal because they have no standard form or process that can deal with my requirement.[/FONT]