Pension flexibility, introduced in 2015, provides those wishing to access their “defined contribution” pension funds with a wide choice of options.
Now, as well as buying an annuity, there are two other methods called Flexi-Access Drawdown (FAD) and Uncrystallised Funds Pension Lump Sum (UFPLS).
But which option to select?
Flexi-access Drawdown (FAD)
FAD allows you to crystallise your pension and take 25% as a Pension Commencement Lump Sum (PCLS).
For UK residents, this PCLS will be tax-free.
For those living overseas, it may be tax-free, but this depends on the double tax treaty between the UK and your country of residence.
The other 75% can be drawn down by as much or as little as you require, whenever you require.
These withdrawals can be taken as regular income or on an ad hoc basis.
They will be subject to income tax in your country of residence.
While funds are waiting to be drawn down, they can remain invested.
It is worth noting that not all pension plans offer FAD. This is especially the case with older plans. If that is the case with your pension, it should be transferred to a plan that does offer FAD before you crystalise benefits.
You are also able to designate funds to FAD in stages. This is known as Phased Drawdown.
At any time, you can choose to take a different option, e.g. annuity or Unfunded Pension Lump Sum (see below) with any funds in your pension that have not been taken as FAD.
James is 60 years old with pension funds of £600,000. He does not need an income until he is 65 but would like to clear his £100,000 mortgage.
In this case, £400,000 could be crystallised as FAD. This would allow him to take £100,000 as his PCLS (25% of £400,000) to pay off his mortgage.
Although crystalised, the other £300,000 remains invested until James requires it.
The uncrystallised £200,000 fund can be left to grow until he is 65, at which point he can access a further 25% PCLS from it.
Uncrystallised Funds Pension Lump Sum (UFPLS)
If you want to access some or all of your pension money, without purchasing an annuity or designating funds as available for drawdown, then a UFPLS allows this.
When you take a UFPLS, 25% will be treated as a Pension Commencement Lump Sum (PCLS).
As with FAD, for UK residents, this PCLS will be tax-free. For those living outside the UK, it may be tax-free, but it depends on the double tax treaty between the UK and your country of residence.
The remaining 75% of the lump sum paid will be taxable in your country of residence.
Each subsequent UFPLS taken will also have this same 25%/75% split applied to it.
This option is worth considering for those that don’t have an immediate need to take their maximum PCLS.
Sue is 60 years old with pension funds of £400,000. She lives in Poland.
Sue does not need capital but she does need an income of £20,000 pa until her other pensions become payable.
In this case, she could take £20,000 each year as a UFPLS.
Of this, £5,000 (25%) would be treated as PCLS and will be tax-free as per the UK Poland double tax treaty.
The other 75% (£15,000) would be taxable as income in Poland.
Prior to 2015, there was a requirement for a UK pension member to purchase an annuity at retirement.
This is no longer the case.
However, annuities do provide certainty of income and may be attractive to older retirees, those in ill health or those that want to minimise investment risk.
At the time of writing, I am not aware of any annuity providers for non-UK residents.
Most people do not know that there are different ways of accessing their pension pots. This has serious implications for tax and future flexibility.
Therefore, it pays to understand the differences before making your plans and take advice from a professional.
Every week, I send out a short email to British expats who are approaching or considering retirement.
I use it to answer common (and not-so-common) questions that they have about pensions and investments.
To receive it in your inbox, just enter your name and email address below.
*I promise that I won’t send you spam (I hate it too) and you can unsubscribe at any time.
▪️Ross has been a financial adviser for the past 26 years.
▪️He specialises in working with British expats over age 50 who are looking to optimise their finances for retirement.
▪️He is qualified as a financial adviser both in the UK, as a Chartered Financial Planner®, and in the EU, as a European Financial Planner®.
▪️Ross has been an expat himself for 22 years and currently lives in Warsaw, Poland with his wife and 2 children.