UFPLS vs flexi-access drawdown - pros and cons

schomosport

Having researched within the forum and the web, a common link that turns up is
https://www.moneymarketing.co.uk/opinion/ufpls-vs-drawdown/
where the author confidently states "UFPLS vs flexi-access drawdown: drawdown wins by a country mile for virtually every situation".
I cannot follow this for my particular situation but I may have missed something. I am primarily concerned with taking maximum benefit from my tax free allowance for the next 4 years until the state pension kicks in. I do not need a tax free lump sum. So, next tax year I plan to take an UFPLS lump sum of £16,667 of which £4167 (~25%) is tax free and the remainder of £12,500 is taxable at 20% but as my annual allowance is £12500 there will be no tax to pay. To minimise charges I will take this as a single payment; the month one tax risk will be mitigated by taking a smaller UPFLS in the current tax year of about £4500 being the balance of the £12500 for this year less PAYE income in the year. Any additional tax on this amount can be lived with until HMRC sorts out the new tax code. As I understand the rules, I continue to have the liberty to invest the balance of the funds in my SIPP as I wish and retain the options of withdrawing further UFPLS in future years or switching to draw down and taking a tax free sum later on. Lifetime maximums are not an issue unless I turn into an investing genius, no large future cash sums are likely and hence the restriction on annual contributions having taken a taxed pension amount isn't a problem either. I think this restriction is common to UFPLS and flex-access drawdown once a taxable element is taken.
What have I not understood, where for my circumstances would flexi-access drawdown be better? I have no wish to denigrate flexi-access; I do want to be sure I won't be making a big mistake by taking this year's UFPLS which I need to do by 23rd March 2020.
All thoughts, comments, advice appreciated.

Albermarle

The article you mention has been discussed before on the forum and there was no consensus that it was correct , or incorrect.

I think the small problem with UFPLS is that you always have to take out the tax free and the taxable in exactly 25%/75% ratio, which might not suit everybody. With flexi access/phased drawdown, you could for example take a tax free sum one year but no taxable income . The next year you could just take taxable income . Or something in between. It's basically a bit more flexible, which could suit some people. Maybe for you the two are giving you the same end result though.

EdSwippet

Albermarle said:

The article you mention has been discussed before on the forum and there was no consensus that it was correct , or incorrect.

I suppose it is best summed up as: correct, but not helpful or illuminating in any way!

UFPLS is nothing magic or different, it is just one fixed configuration of more general flexi drawdown. And because UFPLS is a subset of flexi drawdown, the number of situations for which UFPLS is appropriate is (obviously!) a subset of all existing situations. I'm slightly amazed that the article's author managed to make such a meal out of drawing this self-evident conclusion.

dunstonh

Phased flexi-access drawdown tends to win in the majority of cases we do.   However, scenarios differ and sometimes flexi-access drawdown is used rather than phased.  Or ad-hoc UFPLS.   Some people take the 25% up front but that is usually for debt repayment rather than income need.

There is no general rule of thumb as different solutions will fit different needs.

Some people may initially look to take the 25% up front as a form of income.  However, doing that prevents phased flexi-access drawdown and avoiding tax in year 1 or 2 would often mean paying tax later on.  So, often taking it up front is just a way of deferring the tax bill till later.  The sums would need to be done on individual figures to see which is best.

cfw1994

Some take the 25% up front to try to help avoid potential future tax pain if approaching the LTA 
& remember those LTA checks happen any time you crystallise money (eg, UFPLS or FAD), AND ALSO at age 75..... 

green_man

To OP.  I agree with you that in the scenario you mention the UFPLS is just as good as the phased flexi... Theoretically the phased, flexi approach should win (or at least be equal) in most cases, but that doesn’t account for charges.  I have found that a single UFPLS payment a year is the most cost effective approach for the platform I use. For some platforms the phased flexi approach is a decent option but I have found these platforms tend to be the otherwise more pricy options.

I think the drawdown provision across many platforms is still in its infancy and much improvement is required IMO to provide a decent cost effective flexible product.

zagfles

EdSwippet said:

Albermarle said:

The article you mention has been discussed before on the forum and there was no consensus that it was correct , or incorrect.

I suppose it is best summed up as: correct, but not helpful or illuminating in any way!

UFPLS is nothing magic or different, it is just one fixed configuration of more general flexi drawdown. And because UFPLS is a subset of flexi drawdown, the number of situations for which UFPLS is appropriate is (obviously!) a subset of all existing situations. I'm slightly amazed that the article's author managed to make such a meal out of drawing this self-evident conclusion.

Well, exactly. If one year you want say £2500 tax free and £7500 taxable, just take a UFPLS. If the next year you want more tax free (perhaps because another pension kicks in any you have less PA available), then take phased FAD.

The "very simple" example at the end of someone who pays HRT and wants an extra £10k net a year is a blatently obvious example of where it's probably better to use phased FAD and just take the PCLSs, rather than UFPLS, so avoiding paying further HRT. Although if the taxable remainder ends up getting drawn subject to HRT then it won't make any difference.

One useful point in the article is the death benefits bit, since there's no difference between crystallised and uncrystallised and in fact crystallised could be better as there's no LTA BCE on crystallised, whereas there is potentially on uncrystallised under 75.

schomosport

All helpful comments so thank you. UFPLS it will be for this time around at least. Thanks OP.

RL11

I'm currently weighing up both options too. One thing that occurred to me last night is that if you take a large 25% tax free lump sum via drawdown you might run into problems with having a large amount in savings (e.g. benefit claims and other instances where your financial circumstances need to be disclosed). On the whole, uncrystallised pension pots are disregarded as they aren't considered accessible - even if they are!

zagfles

RL11 said:

I'm currently weighing up both options too. One thing that occurred to me last night is that if you take a large 25% tax free lump sum via drawdown you might run into problems with having a large amount in savings (e.g. benefit claims and other instances where your financial circumstances need to be disclosed). On the whole, uncrystallised pension pots are disregarded as they aren't considered accessible - even if they are!

I think it depends on your age, certainly if you're over state pension age they'd expect you to use an uncrystallised pension to support yourself.

gm0

For completeness - the interaction with LTA has come up on prior threads on the different methods and it does skew the findings for the small group of people with LTA issues already appearing at pension commencement. Very broadly - people with 75-80%+ of LTA in their 50s.....The issue on choice of mechanics being around managing the 25% additional tax at BOTH the point of crystallisation (via % LTA consumed at each event) and again at 75 for the cash value of crystallised benefits and any remaining uncrystallised benefits.

Doing FAD first "up front" - compare crystallised amount to current personal LTA to determine % used.  For 1m = 100%
Crystallised fund growth thereafter 55-75 only needs to stay at a cash value below the indexed LTA at age 75 (the second test) Ensure you draw enough and pay your income tax - basic or higher rate as usual and all is well.  
So for pots around LTA "marking a lot for drawdown" via FAD becomes materially superior to UFPLS to remove future growth + inflation (in protection scenarios) from the first crystallisation BCE tests.  Drawing enough income to manage fund cash level deals with the 2nd test.  No uncrystallised funds at 75 and no excess funds at 55.  Limiting case at LTA £1m as designed.  No penalty at the limit.  Seems logical.

With UFPLS - if large portions of a pot are already growing around and above LTA AND are left uncrystallised well into early retirement (if for example a first 5% nibble is taken with UFPLS) the growth of the 95% (uncrystallised for 1-2-3-n years) is now hit with the BCE and LTA tests *after* it has grown i.e. when it is crystallised in a much later year.  And then the cash value is tested at 75 by the same rules either way AND the crystallisation test occurs on the portion not yet crystallised less any LTA % not yet used.  So clearly there is a chunk of growth that gets hit for the additional LTA 25% tax at age 75 with UFPLS which wouldn't be hit if FAD was to crystallise the benefit before the growth occurred. 

So if this is true (key point is treatment of uncrystallised benefits at 75 - I am a consumer not a professional reader of HMRC runes......consider the following.  I would not like to be the IFA who told the individual with an LTA level pot to use UFPLS to pull 12.5/37.5=50k each year crystallising 5% of 1m for 20 years and then having a 170k tax bill at the end on the residual fund which then gets crystallised at 75 with no LTA left.  Where did these numbers come from.....

A quick spreadsheet for age 55-75 - crystallisation timing, income drawn and returns and annual fund values and taxes paid (BCE events, Self Assessment) with inflation visible so it's all cash values - brings this to life for any starting fund value and growth and inflation and income assumptions.   The extra penalty tax for UFPLS turns up at 75 BCE when you have run out of % LTA but not out of uncrystallised pot.  You care about this or you don't depending upon your view of death and taxes.

Mechanics - for one (or more) crystallisation BCE a % of LTA is consumed by an amount £x each time you do it until 100% is reached and the age 75 test is then about cash (if you are all done by then) but it is also a backstop crystallisation test to stop it the pension being a handy IHT tax shelter for the very wealthy to load up with uncrystallised benefits outside the estate rather than a pension to actually use in retirement.  

So to my worked example. With £1m at 55 and UFPLS you have 2% inflation and 3% return and the government keep CPI at 2% for indexation (no games) and the LTA indexes with the draw.  Then you draw an indexed 50k and you have circa 707k fund value age 75 which is still uncrystallised in this scenario and scraps of LTA left (rounding) - based on the UFPLS draws having drawn circa 5% LTA each time.  Unhappily there is circa £170,000 penalty tax to pay on the not yet crystallised funds of 707k  which are all above LTA because it has all been used in the 20 slices.

Or if you had slammed the crystallisation in up front with FAD at 55 when it was only £1m before it grows.  Same draw, same value at the end (as same return and inflation/indexation and draw).  But nothing to pay out of the 707k - cash value well below the LTA for the crystallised benefits value comparison and nothing left to crystallise as it was all done 20 years prior.

With these assumptions the initial starting pot where this "extra tax" arithmetic disappears is about 75% or 750k.  I am  not for one moment suggesting this is a sensible drawdown plan in either mechanic. It is just arithmetic applied to the tests and rules as I understand them and compounding doing its work.

Now somebody may well be along in a minute to tell me I have got the rules wrong about the 75 test and crystallisation of the residual uncrystallised benefits.  I do hope so - it seems monumentally arcane and unfair if my understanding is *correct* that the method difference and compounding could generate such a different result for the same starting pot, return and inflation for FAD and UFPLS.  If I am wrong I would like to understand why.

If I have made an error it will be on the treatment of the uncrystallised excess at age 75 but I think from reading that the backstop test of uncrystallised benefits is a real thing for the reason I hinted at above and it would catch you out if you did this the "wrong way". 

Clearly one should look at this with assumptions to taste on income, return, inflation and LTA indexation (should be the same but 20 years is a long time and remember RPI and CPI ongoing fuss).  There are two things being optimised - amount crystallised when and cash value at 75.

OP may not be above 75% LTA in the years approaching commencment but others may be and this particular area pays for study or quality IFA advice if one is lucky enough to be "in the zone".