UFPLS or Flexi Access Drawdown

Barry_Bear

I read an article about SIPPs which suggests that FAD wins over UFPLS nearly every time. But I am not sure why it's so clear cut.

Drawdown
1. You can receive your tax-free cash in one payment although you don’t have to use all your pension in one go.
2. You don’t have to take an income if you don’t need it and can take just your tax-free cash and leave the rest invested.
3. Later you sell investments to withdraw cash.

UFPLS
1. You can receive your tax-free cash in one payment or in stages.
2. You don’t have to take an income if you don’t need it and can leave everything invested.
3. Later you sell investments to withdraw cash and every withdrawal will be 25% tax-free.

Would UFPLS do the job if:
You don't need large up front lump sums and want to maximize the investments left to grow.
You wanted to withdraw just what you may need a lump sum once year e.g. £20,000.
You have other income so it would reduce tax if only liable to pay tax on 75% (£15,000) of the £20,000.
You would still like the flexibility at any points in the future to take larger or smaller amounts whenever needed e.g. £1,000, £50,000 

Does UFPLS do all this? Does Drawdown offer anything more advantageous in that context? 

Albermarle

1. You can receive your tax-free cash in one payment or in stages.
2. You don’t have to take an income if you don’t need it and can leave everything invested.

With every UFPLS payment you have to take 25% tax free and 75% taxable income .That is the whole idea .

Notepad_Phil

I don't know which article you read, but I've read many that say the opposite.

Personally I'm doing a bit of both to take advantage of what both types allow you to do.

1. You can receive your tax-free cash in one payment or in stages.

2. You don’t have to take an income if you don’t need it and can leave everything invested.
3. Later you sell investments to withdraw cash and every withdrawal will be 25% tax-free.

I'm not sure you quite understand UFPLS or whether it's the way you've written it down. But for avoidance of doubt, for each UFPLS you will be taking both the tax-free lump sum (25%) and a taxable amount (75%) and will immediately have to start following MPAA rules. You don't get multiple tax-free lump sums, which you might be thinking.

UFPLS also allows you to fine tune your LTA usage.

Drawdown also allows you to take multiple tax-free lump sums out - either with or without taking further income.

Would UFPLS do the job if:

You don't need large up front lump sums and want to maximize the investments left to grow.
You wanted to withdraw just what you may need a lump sum once year e.g. £20,000.
You have other income so it would reduce tax if only liable to pay tax on 75% (£15,000) of the £20,000.
You would still like the flexibility at any points in the future to take larger or smaller amounts whenever needed e.g. £1,000, £50,000 

Does UFPLS do all this? Does Drawdown offer anything more advantageous in that context? 

Yes UFPLS does do all that, but it can take a while to take each UFPLS and there can be issues with too much tax being taken and then you have to reclaim, which aren't so much of a problem with drawdown.

You would also have to be absolutely sure that the MPAA rules would not cause you issues before using the UFPLS route.

dunstonh

I read an article about SIPPs which suggests that FAD wins over UFPLS nearly every time. But I am not sure why it's so clear cut.

I find the opposite as do many others.   However, it will depend on the individual circumstances.

Have you got a link to the article as I am sure many of us here would be interested in reading the context behind the opinion?

Barry_Bear

dunstonh said:

I read an article about SIPPs which suggests that FAD wins over UFPLS nearly every time. But I am not sure why it's so clear cut.

I find the opposite as do many others.   However, it will depend on the individual circumstances.

Have you got a link to the article as I am sure many of us here would be interested in reading the context behind the opinion?

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

Barry_Bear

Notepad_Phil said:

I don't know which article you read, but I've read many that say the opposite.

Personally I'm doing a bit of both to take advantage of what both types allow you to do.

1. You can receive your tax-free cash in one payment or in stages.

2. You don’t have to take an income if you don’t need it and can leave everything invested.
3. Later you sell investments to withdraw cash and every withdrawal will be 25% tax-free.

I'm not sure you quite understand UFPLS or whether it's the way you've written it down. But for avoidance of doubt, for each UFPLS you will be taking both the tax-free lump sum (25%) and a taxable amount (75%) and will immediately have to start following MPAA rules. You don't get multiple tax-free lump sums, which you might be thinking.

UFPLS also allows you to fine tune your LTA usage.

Drawdown also allows you to take multiple tax-free lump sums out - either with or without taking further income.

Would UFPLS do the job if:

You don't need large up front lump sums and want to maximize the investments left to grow.
You wanted to withdraw just what you may need a lump sum once year e.g. £20,000.
You have other income so it would reduce tax if only liable to pay tax on 75% (£15,000) of the £20,000.
You would still like the flexibility at any points in the future to take larger or smaller amounts whenever needed e.g. £1,000, £50,000 

Does UFPLS do all this? Does Drawdown offer anything more advantageous in that context? 

Yes UFPLS does do all that, but it can take a while to take each UFPLS and there can be issues with too much tax being taken and then you have to reclaim, which aren't so much of a problem with drawdown.

You would also have to be absolutely sure that the MPAA rules would not cause you issues before using the UFPLS route.

"for each UFPLS you will be taking both the tax-free lump sum (25%) and a taxable amount (75%) and will immediately have to start following MPAA rules. You don't get multiple tax-free lump sums, which you might be thinking."

You say "each" UFPLS which suggests more than one/multiple. But then say you don't get multiple tax-free lump sums. That seems contradictory can you explain, thanks!

"UFPLS also allows you to fine tune your LTA usage."
More than Flexi-Access Drawdown? Can you explain that also thanks.

rjmachin

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

In a very simple example, a client has a fund of £200,000 and is a 40 per cent taxpayer. Her target income from this particular pension pot is £10,000 a year net of tax. If she took tax-free PCLS first, she could have £10,000 a year for five years and there would still be £150,000 left in her pension fund – even assuming no growth. But if she started drawing taxable income, it would mean depleting the fund by about £16,667 a year and, at the end of five years, there would be only about £116,665 in the pension: £38,335 less.

I don't understand why the writers of this article would, when the target is £10k per year, compare taking £10k of tax free cash for 5 years with taking £16,667 UFPLS and wondering why the amount left is lower.

If the target was £16,667 instead, then it would be a fairer example

QrizB

rjmachin said:

In a very simple example, a client has a fund of £200,000 and is a 40 per cent taxpayer. Her target income from this particular pension pot is £10,000 a year net of tax. If she took tax-free PCLS first, she could have £10,000 a year for five years and there would still be £150,000 left in her pension fund – even assuming no growth. But if she started drawing taxable income, it would mean depleting the fund by about £16,667 a year and, at the end of five years, there would be only about £116,665 in the pension: £38,335 less.

I don't understand why the writers of this article would, when the target is £10k per year, compare taking £10k of tax free cash for 5 years with taking £16,667 UFPLS and wondering why the amount left is lower.
If the target was £16,667 instead, then it would be a fairer example

That example is rubbish, isn't it?

• A £16667 UFPLS gives £11667 after tax.
• A £14286 UFPLS gives £10k after tax (if I've got my maths right).

£200k will last for 14 years whichever way you do it.

I'm glad the author ("Danby Bloch is chairman of Helm Godfrey") hasn't got any involvement in my pension investments.

Notepad_Phil

Barry_Bear said:

You say "each" UFPLS which suggests more than one/multiple. But then say you don't get multiple tax-free lump sums. That seems contradictory can you explain, thanks!

For UFPLS you wrote "You can receive your tax-free cash in one payment or in stages." which was followed by "You don’t have to take an income if you don’t need it and can leave everything invested." and finally "Later you sell investments to withdraw cash and every withdrawal will be 25% tax-free.". 

This to me (and possibly Albermarle) meant that there was a possibility that you misunderstood the details of UFPLS. I.e. you thought you could take just the 25% tax- free sum, then at a later stage take out the 75% with a further 25% of that tax-free.

My comment was trying to make clear that each UFPLS resulted in the one tax free lump sum and the one taxable income. You can of course carry out multiple UFPLS payments, and each of those UFPLS payments will have an associated tax-free lump sum.

 

Barry_Bear said:

"UFPLS also allows you to fine tune your LTA usage."
More than Flexi-Access Drawdown? Can you explain that also thanks.

This only really comes into play if you are likely to get close to using 100% of LTA.

Suppose, for instance, that you were in the lucky position of having £1,000,000 uncrystallised in your SIPP and you decide to now go into drawdown before you break 100% of LTA. What happens if stock markets surge by 10% between you asking to crystallise and it actually happening? Suddenly you're over 100% of LTA. And if you're lucky and you don't go over 100%, you still have the problem of what do you do with the approx £250,000 tax-free lump sum that you've just received. It would likely have been much easier if you had been taking frequent UFPLS along the way and so (for instance) your SIPP only held £500,000 with 65% of LTA left, with the rest outside the pension - though you do have inheritance tax issues to consider.

In my case I've already put a big portion of my pension into crystallisation and taking an income, but I would like the rest to grow as much as possible within a pension but without causing LTA issues. So now I'm taking frequent UFPLS from the second portion whilst keeping a keen interest on how those funds are growing. If it ever starts getting close to the point where my remaining uncrystallised funds is getting  too close for comfort  to using the rest of my remaining LTA, then at that stage I'll put it all into drawdown, hopefully thus avoiding any LTA penalties.

There's also the small point that with regular UFPLS withdrawals you can take advantage that the LTA percentages used are to two decimal places. I.e. whether taking out £1 or £107 would both mean 0.01% of your LTA would be used up. E.g. taking £12,840 in one go would use up 1.19% of you LTA whilst taking out 12 x UFPLS of £1,070 each (totalling the same £12,840) would only use up 1.08% in total.