UFPLS vs flexi-access drawdown

ejstubbs

I'm trying to understand the pros and cons of each of these approaches to accessing my DC pension pot. As I understand it:

- Flexi-access drawdown would mean me taking the 25% tax-free lump sum up front, after which I would take on responsibility for investing it in a manner that would be most likely to give me the returns that I would like (S&S ISA, funds etc). I would then be free to take the rest as and when I wanted, but it would all be taxable (my DB pension will soak up all my personal allowance).

- UFPLS would mean that I would (should?) have the same drawdown flexibility without having to take the 25% tax free lump sum up front, with 25% of each drawdown amount being tax free.

Is that correct?

It seems to me that a potential benefit of UFPLS is that 25% of any growth in the value of my pot over time would be free of tax at each point I accessed it. Whereas, with flexi-access drawdown none of the growth in the fund would be accessible free of tax once I'd taken the 25% lump sum up front (although there would be ways that I could invest at least some of the up-front lump sum in order to get tax-free returns).

Am I misunderstanding this? Is the difference likely to be so minor as to be negligible?

Linton

Your understanding is correct. If you do not need the tax free lump sum and are planning to invest all or most of it, UFPLS is simpler as you dont need to run an S&S ISA in parallel and manage two decumulations. Another advantage of UFPLS is that more money stays in your pension where it will not be liable for Inheritance Tax. On the other hand if you are in danger of exceeding your Lifetime Allowance then getting rid of 25% of your fund would be advantageous. But for most people these would be secondary concerns.

Triumph13

The simplest way to think about it is to imagine the 75% and the 25% as completely separate pots from the beginning. The 25% pot will always come out tax free*. The 75% pot will always be taxable no matter what you do (although you may not actually pay tax on some of it if you have unused personal allowance.)

You want to avoid any investment growth on the 25% being taxable. You can achieve that by any combination of the following:

1. Only take enough out of the pension (via UFPLS) to cover your spending
2. Only take it out as and when you have room in your ISA allowance to stash it away and any non ISA dividends would be covered by the dividend allowance
3. Leave it (and the accompanying bit of the 75%) in the pension

Simples
*Obviously you need to make sure that whenever you pull £x from the tax free pot you also crystallise £3x from the taxable one

zagfles

The other option is to use phased drawdown, where you crystallise part of the pot, take the 25% TFLS from that part, leaving the rest of that part crystallised and available for taxed drawdown, and the rest of the pot uncrystallised.

LHW99

zagfles wrote: »

The other option is to use phased drawdown, where you crystallise part of the pot, take the 25% TFLS from that part, leaving the rest of that part crystallised and available for taxed drawdown, and the rest of the pot uncrystallised.

I assume that would mean that all / any growth in the crystallised part would be taxable on withdrawal? I suppose that would make more difference if you had tax-free personal allowance available than if it would all be taxable.

Albermarle

I assume that would mean that all / any growth in the crystallised part would be taxable on withdrawal?

Once funds are crystallised they are taxable, whether they grow or not.

For the OP , could be worth reading this similar thread /question( with similar answers)
https://forums.moneysavingexpert.com/showthread.php?p=76431172

westv

Usually if you need the 25% for something take it out in one go.
If not then take it out in stages.

ejstubbs

Thanks everyone for your responses to my question: very useful, as was the link to a similar question asked previously.

squirrelpie

One other aspect worth thinking about is the paperwork and/or phone calls involved. Basically every time you take tax free cash, you will have to jump through bureaucratic hoops. Thus, every UFPLS and every drawdown initiation though not every drawdown payment.

LHW99

Also, how are you charged? II seem to end up charging more mor arranging a monthly flexi-access drawdown - even if you don't withdraw in certain months (£10 per month), whereas for UFPLS they charge £50 per withdrawal - so an annual UFPLS would cost less than monthly flexi (the changes for moving into drawdown appear to be the same, if I've understood correctly).

Moe_The_Bartender

Here’s a good read.

https://www.moneymarketing.co.uk/ufpls-vs-drawdown/