Please can you explain the difference between taking amounts from a pension pot by drawdown and UFPLS?
29 July 2021
Question by Jenny
Please can you explain the difference between taking amounts from a pension pot by drawdown and UFPLS? For eg if I have a pot of £100,000 and want to take £2,000 a month, if I chose the drawdown option would I drawdown £2,000 a month? If so then I don't see the difference of taking a £2000 UFPLS each month. Thanks
Answered by James Greenly
There are several ways people can take money out of their pension but the best option will depends on the individuals retirement needs, their risk and reward tolerance and wider financial situation, their retirement age, tax status, the impact on future pension funding and whether they wish to leave a legacy upon death.
Uncrystallised Funds Pension Lump Sum allows you to draw money directly out of your pension in slices. 25% of the withdrawn money is tax free, the remaining 75% is taxed as income.
The main benefits of UFPLS are;
It is allows you to receive your tax free cash and pension in stages.
As you are only accessing part of the pension each time, the remaining funds continue to be invested*. (*Please note the value of your pension is not guaranteed as the value of your pension fund can fall as well as rise in value.)
It could allow you to take your entire pension in one go (normally used if you have a small pension which is unlikely in your case.)
Drawdown is arguably more flexible as it allows you access to your tax free cash independent of any requirement to take a taxable income. Drawdown lets you access the 25% of your pension that is tax free, and the option to draw an income from the 75% income pot whilst allowing your pension to remain invested tax efficiently.
The main benefits of drawdown are:
Access to your tax free cash – you can take your tax free cash in one lump sum or take it in stages as you need it.
A flexible income – control how much you take and how much tax you pay.
If you use UFPLS to extract £2,000 per month from your pension then £500 would be tax free, the remaining £1,500 would be paid net of income tax. It is therefore very important to understand your tax status.
If you use Drawdown to extract £2,000 per month you have the option to take this from your tax free cash entitlement until it is exhausted. In simple terms you are taking £2,000 each month from the initial £25,000 tax free cash allowance. This could provide you with a tax free income for 2 years and no requirement to access the taxable part of the pension. Or you could opt for a combination of tax free cash and taxable drawdown income if that better suited your circumstances.
The answer to this question is therefore not simple nor straightforward but I hope you now have the main benefits of each option.
I would strongly suggest you seek advice from a financial adviser who specialises in retirement planning before deciding on your chosen method of accessing your pension benefits. Each option has its merits and drawbacks and you need to be aware of the risks as well as the benefits before proceeding.
I hope this helps,