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What is an Uncrystallised Fund Pension Lump Sum (UFPLS)?
Posted on: 14th Jun 2016 by: CamOuse Financial Management Limited
The changes to pensions introduced in April 2015 has led to a collection of new financial terms being heard over the past year or so, with the ‘Uncrystallised Fund Pension Lump Sum’ being perhaps one of the most daunting to read on the page and trickiest to say out loud. Thankfully, it can be shortened to UFPLS, but that doesn’t help a great deal in understanding exactly what the term means.
A UFPLS is simply the official term for a withdrawal, either regularly or as a one-off, from a pension fund. These withdrawals can only be made from a pension that has not ‘crystallised’ – that is, it has not been used for an annuity purchase or to enter a drawdown scheme. If you take a UFPLS, 25% of the withdrawal will be tax-free. The other 75% is taxed as income, with the rate being determined by the amount you withdraw and any other income during the tax year.
The UFPLS was introduced by the government so that people had more flexibility in choosing their retirement benefit in an effort to remove the feeling of having no choice but to purchase a pension income product. It allows the person saving to access their fund much more easily in lump sums, which the government hopes will motivate a larger number of people to save for their retirement. However, some commentators, particularly within the press, have reported this freedom in a negative way as being able to use their pension fund in the same way as a bank account.
There are some potential issues surrounding UFPLS, however, such as those choosing to withdraw from their pensions paying too much tax if they do so early in the financial year. This is because income received at the start of a new tax year is interpreted by the tax office as the amount they expect you to receive each month throughout the rest of the year. Those making a one-off withdrawal could therefore be overcharged by HMRC, which means they will have to either wait for an automatic repayment or claim it back themselves. As ever, if you are considering a UFPLS or any other form of pension access, then please consider consulting an independent financial adviser, who will be able to help you at every stage in the process.
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Understanding the true cost to your business
Pension arrangements must be available for all employees. There are three categories of employee:
Eligible
Aged between 22 and State Pension Age (SPA) with qualifying earnings over the Auto Enrolment earnings trigger
Non-eligible
Entitled
Important Notes
- Eligible jobholders must be auto-enrolled
- Non-eligible jobholders are allowed to be auto-enrolled if they want to
- Entitled workers are entitled to join a pension scheme, but the employer doesn't have to contribute
|
Qualifying Earnings lower threshold |
£5,772 |
|
Qualifying Earnings upper threshold |
£41,865 |
|
Automatic Enrolment earnings trigger |
£10,000 |
Minimum contribution level options:
|
8% of Qualifying Earnings of which |
3% is employer's (starting at 1%) |
|
9% of Basic Salary of which |
4% is employer's (starting at 2%) |
|
8% of Basic Salary of which |
3% is employer's (starting at 1%) |
|
(Where basic salary is at least 85% of total earnings) |
|
|
7% of gross earnings of which |
3% is employer's (starting at 1%) |
Pay reference period
Essentially the frequency that the jobholder is paid e.g. monthly, weekly etc. but with reference to the tax month, week etc. therefore it may not be the same as the payroll period.
Deduction and payment of contributions
It is the employer who is responsible to calculate, deduct and pay all contributions to the AE scheme. NOTE – the first and last contributions are likely to be for less than a full pay reference period and should be adjusted accordingly.
Payroll services
It can be seen that it is very important that the payroll system synchronises with the AE scheme otherwise the employer will not be carrying out all requirements and then penalties will be incurred.
Staging date
Based on the employer’s payroll size as at 1 April 2012 and can be found at www.thepensionsregulator.gov.uk/employers using your PAYE reference. The Qualifying Workplace Pension Scheme must be registered with The Pensions Regulator within 4 months of the staging date.
Compliance and communication
Postponement
Auto-Enrolment can be postponed for up to 3 months:
- For current eligible employees
- For workers that meet the criteria in the future for the first time e.g. avoid joining temporary or lower paid workers
Opt-Outs
All eligible employees must be auto-enrolled, but can, with the correct notification, opt-out within one month of joining the scheme and be treated as never having joined. They can opt back in and will automatically be auto-enrolled every 3 years in any case!
Communication
There is a wide range of information that must be provided to all employees at certain times, such as:
- The date auto-enrolment took place for eligible jobholders
- That non-eligible jobholders have the statutory right to opt in
- Entitled workers have the right to request the employer to enrol them into a pension scheme
Salary sacrifice
Contributions can be paid by effectively reducing salary, which saves on NI contributions, but employee must choose to do this – they cannot be forced, so a contractual variation will need to be implemented.
Default investment fund
Investment Options
All eligible employees will be automatically invested into a default investment fund, which is a balanced risk fund that is “life styled” to account for the employees approach to retirement. They also have the option to invest in a wide range of funds of their choosing.
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