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As individuals approach retirement age, it becomes crucial to understand the distinctions between UFPLS (Uncrystallised Funds Pension Lump Sum) and flexible drawdown when considering pension options.
What is UFPLS?
UFPLS enables individuals to withdraw a portion or all of their pension savings as a lump sum. Typically, 25% of the amount is tax-free, while the remaining sum is considered taxable income. However, it is important to be aware of certain restrictions and considerations associated with UFPLS.
What are the advantages of UFPLS?
When it comes to the advantages of UFPLS, flexibility is a key factor. This approach provides the freedom to access some or all of your pension savings as a lump sum, with some being paid tax-free. Moreover, individuals have complete control over how they then use this lump sum.
What are the disadvantages of UFPLS?
On the downside, UFPLS doesn’t provide complete control over withdrawals. The requirement to take 25% of each withdrawal as a tax-free cash sum limits the flexibility of withdrawals. Additionally, there are tax implications to consider, as the taxable portion of the UFPLS withdrawal is subject to income tax. UFPLS will normally be taxed using an emergency tax code. This can result in an initial overpayment of tax potentially reducing the amount to be received. However, any overpayment can be reclaimed.
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What is Flexi-Access drawdown?
Flexi-Access drawdown offers individuals the option to receive an income and lump sums from their pension savings while leaving the remaining amount invested. This approach provides greater flexibility and control over retirement income.
What are the advantages of Flexi-Access drawdown?
One of the primary benefits of flexible drawdown is income control. Individuals can choose the desired amount withdrawn and timing based on their specific needs. The ability to adjust withdrawals as and when required provides flexibility to suit changing financial circumstances. Furthermore, flexible drawdown allows individuals to optimise their tax position by deciding the mix of tax-free cash and taxable income to withdraw, minimising the amount of tax paid.
What are the disadvantages of Felxi-Access drawdown?
On the flip side, Flexi-Access drawdown is not without its drawbacks. Money held in the pension is subject to fluctuations based on the performance of the investments. Depending on the performance of the investments and the amount withdrawn over time will determine how long your pension fund will last. If withdrawals are high versus the fund value and investment performance, your fund could deplete quicker than you would want, or withdrawals would need to be reduced to ensure the fund is sustainable.
Which may work better for you?
When deciding between UFPLS and flexi-access drawdown, it is important to carefully consider your individual circumstances and preferences. Those who prioritise accessing a tax-free lump sum from their pension savings and value some flexibility may find UFPLS to be a suitable choice. However, it is essential to be aware of the restricted nature of UFPLS withdrawals and the potential impact on taxable income.
Conversely, individuals who value the flexibility of choosing and adjusting their desired income whilst keeping funds invested may find flexi-access drawdown to be the better option. The potential for growth and the ability to customise the income stream allows for the optimisation of the tax position.
We would advise you to seek advice from a qualified financial adviser before making any decisions regarding pension options. At Henderson Loggie Financial Planning, our experienced advisers can provide personalised advice tailored to your circumstances. Contact us today using the form below to learn more about how we can assist you.