What are the DC options?
A member with DC benefits has the right to access flexible benefits from age 55. The member has the option to use the benefits for:
A scheme does not have to offer UFPLS or FAD.
However, it must still tell the member about them and the member has a right to transfer their benefits into an arrangement that does offer these flexibilities.
We will now consider these options.
What is UFPLS?
This is where you can withdraw the whole fund as cash or take a series of withdrawals as and when you need access to cash.
Each payment is a separate crystallisation event and tested against your LTA. For each payment, up to 25% can be taken tax free with the remaining 75% taxed as income at the member’s marginal income tax rate.
This effectively means you don’t have one "retirement date”.
A few things you need to consider with this option are:
EXAMPLE:
A member is 58 and has a pension pot of £80,000.
She’s happy with the investment performance so doesn’t want to change anything right now, but wants £15,000 for a well-deserved holiday.
Initial portion £15,000
25% tax free = £3,750
75% taxable = £11,250
Left Invested in scheme £65,000
How does FAD differ from UFPLS?
You can only take one tax free cash sum of up to 25% of the value of the fund at the point of retirement, which is when the fund crystallises and is the only time the LTA test is applied.
The remaining 75% of the drawdown fund remains invested, but when you do take further payments, the whole amount taken each time will be taxed as income.
As with UFPLS you still need to think about the tax implications and budget properly to make sure you don’t run out of money.
Money Purchase Annual Allowance (MPAA)
Once benefits have been accessed flexibly, any further contributions that receive tax relief will be limited to the MPAA which is currently £10,000.
UFPLS V FAD Summary
| UFPLS | FAD |
| Each payment is a separate crystallisation event (BCE6) | Member crystallises all drawdown funds at point of retirement (BCE1) |
| No one "retirement” date | Member can take up to 25% of fund as PCLS into drawdown fund |
| Each payment consists of 25% tax free cash, 75% taxed income | Each drawdown payment is taxed as income |
| Paid directly from scheme | Drawdown could be provided within scheme or by transfer to another vehicle |
| Each payment tested against the LTA | LTA tested at retirement only |
| Cannot be used to purchase an annuity | Can be used to purchase an annuity |
What if I want regular income?
This can be achieved by using all, or some of the pension pot to purchase an annuity.
The amount of pension received will depend on the value of the fund, your age and the annuity rate when you retire for the benefits you decide to take.
For example you can choose if the annuity is:
Before purchasing an annuity you will be asked to complete a questionnaire about your health, lifestyle and income requirements. It may also include questions about your finances. The information is used to ensure that quotations provided meet your needs as currently once purchased, the annuity cannot be changed.
There is more information about annuities in the module "Annuities and Pension Benefits”.
Open Market Option (OMO)
This only applies where a member is looking to purchase an annuity. It allows the member to "shop around” and buy their annuity from the insurance market rather than taking the pension offered by the scheme.
Why should a member do this?
The default rates offered by their own pension scheme may not be competitive.
The member may qualify for an Impaired Life Annuity which pays higher income if there is a health problem.
