When withdrawing money from your pension, you have a few options to consider. Two of the most popular choices are Flexi-access drawdowns and Uncrystallized Funds Pension Lump Sum, or UFPLS.
While both methods have similarities, they also have distinctions that you should weigh for your needs. It’s important to understand what each one does to see what will work best for you.
Defining Terms
A pension draw-down is a way to get a regular income from your pension fund. In this option, after you have withdrawn your initial tax-free amount, the remainder of your pension gets reinvested in funds that suit your needs.
The idea is that you would be able to withdraw from these funds a little bit at a time, including as a regular source of income. If you prefer to take out the money at varying intervals, you are also able to do this.
The UFPLS option is for people who want to take out a lump sum from a part of their pension they have not accessed yet. The lump sum will be divided so that 25% is tax-free, and the remainder is subject to taxation. Every future withdrawal will be taxed the exact same way.
Both of these have similarities. You can access them after turning 55 years old. They also don’t have the security of an annuity because the funds are being invested. If you want to change your retirement options at any point in the process, both allow you to do so. Still, there are some big differences, and you have to figure out what works best for you.
How Taxes Work for Drawdown Vs. UFPLS
The biggest disparity is in how things are taxed. While drawdowns allow you to remove the initial 25% lump sum tax-free, UFPLS taxes 75% of every single withdrawal.
This makes a difference with the remainder of your pension after your initial withdrawal. If you choose to withdraw your entire tax-free lump sum initially with UFPLS, the rest of your payment gets paid out, too, whether you like it or not. This remainder is taxable and could be taxed a lot depending on the size of your pension.
Drawdown is different because you are not required to take that remainder out right away. You can choose to withdraw that money whenever you want. However, if you’re just trying to take out part of that tax-free sum, either option will allow you to take out the remainder when you choose to.
When you pass away, the way taxes are handled for both are typically the same. People under 75 are normally not taxed, but those who are at least 75 will have taxes for their beneficiaries on future withdrawals.
There are always risks that need to be weighed when making a major decision on something like your retirement fund. Because it’s an investment, any actions on your pension can have major impacts, including the possibility of having it run out prematurely. It’s important to know all the facts and gather advice beforehand, so you can choose the best option for your future.
