Any point to choosing UFPLS?

sheslookinhot

squirrelpie said:

AIUI no retail SIPP allows monthly UFPLS withdrawals (or other repeated regular intervals), so unless something has changed it's pointless talking about the possibility.

My other half takes monthly UFPLS withdrawals. Requests and fills out an application form monthly.

MoneyBin

Prism said:

dunstonh said:

Let's say you have someone who is aged 58 with no other income but needs a draw of £16k a year.     Why would you waste any more tax free cash than you need to pay that £16k a year?  You would do a UFPLS of £1,333 per month (or £16k a year) of which 25% is tax free but the 75% chunk falls fully within the personal allowance and is tax free.   The pension remains 100% uncrystallised.

Similar can work where people with larger funds/needs look to use up the basic rate band.  UFPLS would aim to have the 75% use up the basic rate band and excess personal allowance with the 25% chunk on top.

In that example couldn't you just drawdown (using FAD) £16k and take exactly the same amounts out. I also cannot see a scenario that UFPLS can do that FAD cannot do.

Someone using UFPLS to take £16,760 as sole income for the year - from a DC pot of say £200k - would receive £4,190 tax-free and £12,570 taxable income, but would use their personal allowance to pay no tax, so the total tax-free would be £16,760. The remaining Pension pot of £183,240 would still be uncrystallised, meaning that the same or different approach could be taken in the following years. In the meantime, since the rest of the SIPP investments remain unaltered, the total amount could continue to grow - a little over 9% would bring the pot back to £200k. Note however, that MPAA would kick in on the first withdrawal, limiting any external 'toping up' of the pot to a maximum of £10k.

If that person instead used FAD to take £16,760 as a tax-free lump sum, then they would receive all of the £16,760 regardless of other taxable income, however, this would represent a 25% PCLS, and a matching 75% amount of £50,280 would be placed into a Drawdown account, which could be taken in future as fully taxable income. This means the remaining uncrystalised SIPP account would be reduced by £67,040 to £132,960. Both the now separate SIPP and Drawdown accounts may continue to be invested and grow separately. 

In the example, we may speculate that the person aged 58 is taking early retirement, has no regular income going forward, and is hoping to 'get by' using annual UFPLS withdrawals (which maybe supplemented by other savings) until their State or other pensions kick in at age 67.

On that basis, with UFPLS, over 9 years they would withdraw £150,840, pay no tax, and they could still withdraw a tax-free lump sum of 25% the remaining funds. Assuming zero growth, the remaining pot would be only £49,160, so the lump sum would be just £12,290; however, if the SIPP had grown each year by 9%, thereby 'replenishing' itself and remaining at £200k, then the possible tax-free lump sum would be £50k. Alternatively, further UFPLS withdrawals could continue. Hence maximising flexibility of options at that point.

Comparing that to using FAD, after 3 years all of the SIPP funds would now be in drawdown, and no future tax-free lump sums would be possible. Of course, instead of taking more tax-free lump sums, they could spend the Drawdown funds also making use of their personal tax allowance (if possible). But after 9 years all the possible FAD tax-free lump sum funds would be gone.           

So the key difference between the two approaches is whether it is possible to make use the personal tax allowance for UFPLS withdrawals, and thus may be desirable to maximise the amount of uncrystallised funds for future income or lump sum use. Whereas with FAD, once 25% of the entire DC pot is used, everything that remains would be taxable income, but taking a lump sum up front is maybe what is wanted.

gm0

If I recall correctly. Accuracy of my recall subject to government meddling. I needed to understand this about 5 years ago.  And am not tracking it as carefully now.

Looking beyond the personal tax allowance discussion about annual self assessment taxation and 16k income example.

The other issue not highlighted particularly yet is the uncrystallised growth.  With UFPLS (salami slices mixing taxed and untaxed at a single moment).  Additional growth of the uncrystallised pot which you have not yet sliced. Generates additional tax free cash up to the lifetime cap during retirement (growth assumed).

With FAD.  The 25% of current value is taken. And growth of the marked for income 75% associated with that 25% does not generate "new" tax free cash if it grows.  It is sat their awaiting income.  It may grow.  But it is crystallised.  And you have already had the 25%. It is taxed as income.  No new tax free cash

Advantage UFPLS but pot size dependent as to significance to you.

With 2027 pension and IHT changes there are additional issues to consider re pot, gifting, SIPP vs ISA and future rules.

We are often told "we can only work on current rules".  Well current rules include  "gifting - PET 7 years is still allowed".  At the moment.  TFC (from FAD) is captial for gifting.  Tick tock.  40% saving for heirs and no income tax on the capital gift.  

From 2027 pension residue will be taxed at 40% (IHT).  So leaving it in your pension until 2nd death is now less attractive (it was attractive when residual DC pensions were outside your estate for IHT).  More attractive is extracting it now and getting it into the hands of the kids earlier when they need it.  
Before the chancellor bolts the stable door on gifting.  But after your kids are ready to receive it.  Be lucky.  Nice that rules will be different for people a year or two apart. And the tax consequences wildly different.  But hey.  Here we are.

This is assuming there is an overall IHT position in the first place - either from property or anything else.   So anyone who is a boomer/gen-x and owns a house - particularly in the SE.  It was possible to downsize your way out of rich world from property.  With DC pensions now added on. It isn't.

After IHT - taxed again at child's marginal rate - so another 20% or 40% if a higher earner on the pension income benefit. So we are at 60% or 80% confiscation.  If they add NI on pensions in payment "because fairness" then higher again.  With student loans on top -  which many of the current generation have - another % rake on that new income (this is a loan freely agreed to - but the total rake is quickly going to approach complete confiscation of the parents residual pension benefits as inherited.  

In turn affecting the risk vs return of remaining invested in drawdown. And the attractiveness as of today of FAD and UFPLS.

No wonder PET gifting and annuity purchase to move the capital away (joint life RPI indexed annuity) are both seeing surges in popularity - the risk/return equation is changing.  A brief window between compulsory annuities, crippled drawdown, full osborne freedoms drawdown and 2027 - is closing.  Times they are achanging.

I despair I really do.  If there is one area of financial services policy for which citizens need stable assumptions for long term planning. It's pensions.

But really why go to the trouble of the speculative risk management of invested DC drawdown if the chancellor plans to just hoover the lot - and alternatively leave you to your own devices - if it falls to work becuase the world doesn't co-operate. 

Advantage FAD - if your objectives include gifting money to kids - say for housing depost.

If you don't and you need all your pot for your own retirement income.  Then UFPLS is pretty much nailed on.

ali_bear

The underlying rule is the same, what makes the difference for the recipient are the mechanics of deaccumulation and how the provider platform works. My workplace scheme with Aviva was set up before 2016 and it doesn't support an automated monthly withdrawal, although their more recent products do. And making a regular monthly fund sale and payment removes the need to worry about the ups and downs of the fund's market valuation that would come with a larger and less regular UFPLS-style transaction. 

Albermarle

With FAD.  The 25% of current value is taken. And growth of the marked for income 75% associated with that 25% does not generate "new" tax free cash if it grows.  It is sat their awaiting income.  It may grow.  But it is crystallised.  And you have already had the 25%. It is taxed as income.  No new tax free cash

Some providers do insist on all the tax free cash to be taken before, you can take taxable income.

However AIUI with a flexible provider, you can start to take taxable income with FAD after only taking a portion of your tax free cash. No need to take all of it upfront, so still some possibilities for it to grow.

gm0

Phased FAD is a thing.  Slice 1,2,3.   I did that.  

AIUI - the option to take cash - on a given slice of benefits taken - was a one time decision. Option lapses if not used. Or partially used instead of full 25%.  Taking a smaller slice of benefits overall. And taking 25% (or scheme specific % if different - historic schemes). Provides flexiblity to tailor the amount.   

If (as is possible) regulation has since shifted to be more permissive on timing of TFC.  
That still does not mean all providers will have changed policy and systems to do it.  Some may still be one and done.  Like many other pension features

As usual - clear as mud

sgx2000

Biggest problem with UFPLS is getting the tax back.
I applied 11 weeks ago.
Still waiting...

Benefit.
Whole uncrystalized pot increases (not just the crystallized pot)
so increases the tax free amount in the future

bownyboy

@sgx2000 agreed. Last year it took 4 weeks, this year it took 16 weeks!

SVaz

My Wife took a taxable lump sum from her drawdown account in February to use up her remaining personal allowance,  she paid £70 tax and apparently can’t claim it back until she gets a tax calculation letter by November, according to her online account.  Hargreaves don’t refund overpaid tax,  despite the hmrc site saying providers may.   How does it take over 7 months?  

Dazed_and_C0nfused

SVaz said:

My Wife took a taxable lump sum from her drawdown account in February to use up her remaining personal allowance,  she paid £70 tax and apparently can’t claim it back until she gets a tax calculation letter by November, according to her online account.  Hargreaves don’t refund overpaid tax,  despite the hmrc site saying providers may.   How does it take over 7 months?  

Employers and pension payers can refund tax, but only during the tax year, once it has ended it's down to HMRC (assuming you don't file a tax return).

A fairly common ploy is take a very small extra payment in a later month (in the same tax year) and the the pension payer has to refund any overpaid tax (assuming the tax code in use is a cumulative one).

But that is no good now for 2024/25, she needed to do that during 2024/25.