Drawdown vs UFPLS

CoffeeLover

Hiya,

Just trying to be clear on the difference between these two. With Drawdown, do you have to take your tax free amount up front. For ease, assume a 200k pot and 50k tax free. Do I have to take the 50k in one hit, or can I take say 10k/year for 5 years? With UFPLS I assume you can take money as and when (from 55), although the first 25% is tax free. So a 10k withdrawl is 2.5k tax free, and 7.5k taxed. Am I right?

Also given that I'm turning 55 in 2023, is there an expectation that the early access age is going to creep upwards? ie. can I safely (?) plan on getting access to tax free funds at 55 (2023), or might it be 56 and 2024? Thanks. CL.

Aretnap

CoffeeLover wrote: »

Also given that I'm turning 55 in 2023, is there an expectation that the early access age is going to creep upwards? ie. can I safely (?) plan on getting access to tax free funds at 55 (2023), or might it be 56 and 2024? Thanks. CL.

The current intention is to increase the age to 57 in 2028, though there is no legislation actually in place yet so things could change. If you turn 55 in 2023 you can probably be reasonably confident that you won't be affected, though not certain as we're not talking about either death or taxes. More info in this thread

https://forums.moneysavingexpert.com/discussion/5902379/private-pension-increase-from-55-in-2028#topofpage

CoffeeLover

Interesting reading thanks. Hopefully the markets will be in a better state by then, else I might be hanging on.

Paul_Herring

Do I have to take the 50k in one hit, or can I take say 10k/year for 5 years?

You could crystallise £40K a year, withdraw £10K (the 25% PCLS/TFLS) and leave the remaining £30K within the wrapper.

CoffeeLover

Thanks. That's interesting, didn't realise you could do that, assumed it was all or nothing.

jamesd

Both are forms of drawdown but while UFPLS forces you to take a 25% tax free and 75% taxable split, flexi-access drawdown (the formal name for the more flexible option) lets you take 25% from any portion of your pot as a tax free lump sum then any portion of the 75% taxable that you like.

This can help with tax planning sometimes, since you can take taxable money just up to your personal alowance if you like.

Alternatively you can help tax efficiency by funding your annual ISA contribution limit. Say you need £12k to live on and the personal allowance is 12k. You might take benefits (crystallise) 80k to take a 25% tax free lump sum of 20k for the ISA and take 12k from the 75% 60k to live on with no income tax due on that either. That would leave 48k taxable in the drawdown account for later. But taxable doesn't necessarily mean tax due if it is going to be within your personal allowance. If you only needed 10k to live on you could take 18k tax free lump sum and 12k taxable to fund the ISA and live on, all with no tax due if you have no other taxable income.

So flexi-access drawdown is a much better tool for optimising things like tax while UFPLS is a simple option that pension firms with older priducts can still make available without lots of work to upgrade old computer systems.

squirrelpie

Hasn't been mentioned yet, so do remember that if you take anything other than tax free money from your pension fund (i.e. even a single penny that's taxable) then it will limit how much you can pay into pensions from then on. It may or may not matter in your particular circumstances.