RP case studies: UFPLS rules at age 75 expained

Turning 75 still affects a range of different pension rules. Here Jessica List demonstrates how it affects clients who may wish to take an uncrystallised funds pension lump sum (UFPLS)

The situation

Pat’s clients, Victor and Orla, are brother and sister. Both want to take a UFPLS from their pensions.

Victor is 68. He used up 90% of his lifetime allowance during the 2017/18 tax year by taking a £225,000 pension commencement lump sum (PCLS) and putting £675,000 into flexi-access drawdown. He has further uncrystallised pension benefits worth £153,000 in another pension scheme that does not offer drawdown. He would like to exhaust this pension using a UFPLS.

Orla is 77. She had used up 95% of her lifetime allowance by the time she reached her final lifetime allowance tests at age 75 in February 2018. At that time, she still had remaining uncrystallised pension benefits worth £40,000, which used up 4% of the £1m lifetime allowance at the time. The uncrystallised funds are now worth £60,000 and Orla would like to withdraw them using a UFPLS. She has worked out the net amount it will provide and already has plans for the money.

Pat is aware that the UFPLS rules are a little tricky when people have reached the lifetime allowance, and that there are differences in their treatment before and after age 75; however, he hasn’t personally dealt with these issues before. He speaks to a colleague who has more experience with UFPLS before the meeting he has planned with Victor and Orla to go over their plans in more detail.

When Pat meets with Victor and Orla, he goes through Victor’s situation first. He explains that Victor will not be able to withdraw the full £153,000 as a UFPLS. This is because the rules state that for someone below age 75, a UFPLS has to be entirely within the person’s remaining lifetime allowance. This is to stop people from receiving a higher tax free amount from a UFPLS than they would be entitled to receive as a PCLS if they were using a different method of taking pension benefits. Victor has 10% of his lifetime allowance available. During the 2020/21 tax year this would allow him to take a UFPLS of £107,310.

Victor asks how he would be able to access the remaining uncrystallised funds if the scheme does not offer drawdown and the rules won’t allow a UFPLS. Pat confirms that, assuming Victor wants to withdraw the remaining funds rather than transfer them elsewhere, they could be paid as a lifetime allowance excess lump sum, which would be subject to a 55% charge. Pat also confirms that Victor should be able to request the UFPLS and the lifetime allowance excess lump sum at the same time and the provider should be able to process them together.

Orla asks if this means that she can’t take her planned UFPLS either, as she also does not have enough lifetime allowance remaining to cover the payment. Pat explains that Orla will be able to withdraw her UFPLS, but it won’t be taxed in quite the way she was expecting.

Because Orla is over 75, the rules state that she only needs to have some of her lifetime allowance available when the UFPLS is paid. For this purpose, the amount used up by testing her uncrystallised funds at age 75 is ignored.

However, the rules also state that the tax free portion of the UFPLS is restricted to 25% of Orla’s remaining lifetime allowance. Similar to the lifetime allowance condition for under 75s, this also makes sure that people can’t get a higher tax free amount through a UFPLS than they could receive as a PCLS.

Orla had 5% of her lifetime allowance remaining before her age 75 test. This now equates to £53,655. Therefore £13,413.75 of Orla’s UFPLS will be paid tax free, and £46,586.25 will be subject to income tax.

The results

Pat confirms that Victor and Orla both want to proceed with the payments they have discussed.

Orla will receive a few hundred pounds less in total from her UFPLS than she was expecting, but it isn’t too much of a problem. She’s sure she can adjust her plans or make up the money from elsewhere, or if necessary will simply take a small income payment from her pension in addition to the UFPLS to make up the difference.

Pat will instruct Victor’s pension provider to pay the maximum UFPLS available and to process the remaining pension benefits as a lifetime allowance excess lump sum.