The Paraplanners

UFPLS in practice Wed 23 Mar 2016

The other day, we were asked to write a recommendation report for UFPLS.  This post isn’t really about the reasons for recommending UFPLS, it’s more about practicalities.

The client was 60 and had 2 straightforward plans worth £25,000 and £30,000 respectively which she wanted to cash in completely. Neither plan offered flexi-access drawdown. 

The first thing we had to do was check that UFPLS was available:

  • The pensions must be uncrystallised and in a money purchase scheme.
  • The member has to have enough scope within the Lifetime Allowance to fully encash.  If they don’t, any withdrawal which exceeds the available LTA isn’t UFPLS at all, it’s an LTA excess payment and subject to an LTA tax charge. 
  • Do the providers offer UFPLS? They don’t have to, meaning the member might have to transfer somewhere else.

In our case, the member could meet the requirements and both providers offered the option. There are a few other conditions for members with LTA protection, periods of non-residence and where the benefits have arisen from a pension sharing order but these didn’t apply.

The next stage was to estimate the tax payable on the withdrawals.  25% of each would be tax free with the remaining 75% of each subject to income tax. The client had other income of around £15,000 per year.  There was a planning point here. If both plans were encashed in the same tax year, the taxable withdrawals would total £41,250, pushing her firmly into higher rate tax.  By encashing one before the end of the current tax year and the other afterwards she could avoid higher rate tax completely.

But that’s not the whole story.

This client’s providers didn’t know her tax code as she’d never taken withdrawals from these plans before.  Both providers confirmed they would have to apply ‘emergency month 1’ tax to the payments but this might not be the case with all providers - it is worth checking in advance.  The emergency tax calculations assume the member has no other income but, importantly, the lump sum is judged to be the first of identical monthly withdrawals kept up for the rest of the year. The result was that the providers would deduct too much tax at source and the client would have to reclaim overpaid tax from HMRC. 

We decided we’d estimate the tax deducted so the client wouldn’t get a fright!  The providers we spoke to will do the calculation for you, but we thought it might be helpful to show the method. Here it is for Plan 1 (for Plan 2 we’d need to repeat but use 2016/17 allowance and thresholds).

Plan 1 (2015/16 tax year) - Value £25,000

Tax band

Gross amount by tax band

Tax deducted at Source

Net sum received

Personal Allowance

£883 (£10,600/12) 

£0 (0%)

£883

Basic Rate Tax

£2,648 (£31,785/12)  

£530 (20%) 

£2,118

Higher Rate Tax

£9,851 (£118,215/12) 

£3,940 (40%) 

£5,911

Additional Rate Tax

£5,368

£2,415 (45%) 

£2,953

TOTAL

£18,750

£6,885

£11,865

 

Adding in the PCLS of £6,250, we could therefore tell the client that they could expect to receive £18,115 from the provider.  The actual tax bill for the withdrawal would only be £3,750 and so the client would be able to reclaim £3,135 from HMRC.  Some providers will supply the forms to do this on request.

By going that little bit further and estimating the tax deducted at source, it might prevent a panic phone call from clients after they’ve received their UFPLS payment.

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