Uncrystallised Funds Pension Lump Sum (UFPLS): Taxation, Rules, and Considerations for UK Expats

However, there are potentially straightforward and tax-efficient options, depending on individual circumstances, to access your UK pension funds, and an uncrystallised funds pension lump sum (UFPLS) can be an effective option for some expats.

You should make several important considerations before withdrawing funds to avoid excessive taxation and administrative or regulatory issues that may erode the value of your pension pot.

This article outlines the most important factors UK expats approaching retirement should consider to manage withdrawals efficiently and reduce unnecessary tax exposure.

What Is an Uncrystallised Funds Pension Lump Sum (UFPLS)?

An uncrystallised funds pension lump sum (UFPLS) allows you to withdraw money directly from a defined contribution pension without purchasing an annuity or setting up a drawdown arrangement. Each UFPLS payment crystallises only the amount withdrawn, while the remaining pension funds stay uncrystallised.

You may make single or multiple UFPLS withdrawals, subject to your pension provider’s rules. Each withdrawal consists of a tax-free portion and a taxable portion, which can help manage the overall tax impact of accessing your pension.

UFPLS is not available in defined benefit (DB) schemes such as final salary pensions. It can only be utilised with defined contribution (DC) pensions, such as:

• Personal pensions.
• Stakeholder pensions.
• Certain workplace pensions.

Provided you have not already accessed your pension benefits in a way that restricts UFPLS availability, you can access UFPLS upon reaching the normal minimum pension age, currently 55, although this is set to increase to 57 in April 2028.

Some individuals may retain a protected pension age under the rules of their pension scheme, allowing access earlier than 57.

Uncrystallised Funds Pension Lump Sum vs. Flexi-Access Drawdown

UFPLS is fundamentally different from flexi-access drawdown (FAD) and is often considered administratively simpler by some pension holders.

FAD involves transferring a portion or the entirety of your pension into a drawdown pot, from which you can withdraw income or lump sums. The transferred amount is crystallised, while any remaining funds outside drawdown may stay uncrystallised, depending on how much is designated.

UFPLS does not require the creation of a drawdown arrangement, allowing you to make withdrawals directly from your uncrystallised pension. The implications of doing so include:

• No obligation to create a separate drawdown pot.
• Flexibility to make withdrawals on an ad hoc basis.
• Continued investment of the remaining uncrystallised pension funds.

For instance, if you have £300,000 in your pension and need £20,000, you could withdraw £20,000 as a UFPLS (with 25% of that amount normally paid tax-free) without crystallising the rest of your funds.

Although UFPLS is often viewed as more convenient than FAD, it also imposes notable limitations. The most prominent is availability, as not all pension providers offer UFPLS.

If this is the case with your provider, you may need to transfer to another pension scheme (which may involve time, costs, and investment disruption) or utilise FAD to access your pension funds.

How Much of Your Pension Can You Take Without Taxation as an UFPLS?

Under UFPLS rules, normally 25% of each individual UFPLS withdrawal is paid tax-free, subject to the availability of your remaining lump sum allowance.

The remaining 75% of each withdrawal is added to your other income for the relevant tax year and taxed at your marginal income tax rate.

As for the overall limits, there are two applicable allowances defined by HM Revenue & Customs (HMRC):

1. Lump Sum Allowance (LSA): £268,275 across all your registered pension arrangements
2. Lump Sum and Death Benefit Allowance (LSDBA): £1,073,100

These are lifetime allowances, so withdrawals should be planned carefully if you wish to maximise the tax-free element of UFPLS.

If you have already used part of your LSA (for example, by taking tax-free cash from another pension arrangement), the remaining available allowance will be reduced accordingly. Once the LSA has been fully used, any further UFPLS payments will be fully taxable as income, even if taken as lump sums.

How Is the Remainder of Your Lump Sum Taxed?

The taxation of the remaining 75% of your UFPLS withdrawal involves the following:

1. Emergency tax codes
2. Tax reclaiming
3. The money purchase annual allowance (MPAA)
4. The longer-term impact of UFPLS on future pension planning

Emergency Tax Codes

Once you make your first UFPLS withdrawal, your pension provider will deduct UK income tax via the Pay As You Earn (PAYE) system and pay you the remaining balance. To make the deduction, the provider requires a tax code issued by HM Revenue & Customs (HMRC).

If HMRC has not issued a tax code at the time of payment, the provider must apply a Month 1 (non-cumulative) emergency tax code (such as 1257L) on a temporary basis.

The emergency code assumes that the withdrawn amount will be paid to you every month during the tax year, even if this is not the case where you are taking a one-off lump sum.

For instance, if you make a £40,000 taxable UFPLS withdrawal, the Month 1 tax code will treat it as an annual income of £480,000. Consequently, this may temporarily push you into a higher tax band and result in an overpayment of UK income tax.

HMRC recognises this issue and allows overpaid tax to be reclaimed.

Tax Reclaiming

In the event of overpayment due to the emergency tax code, HMRC allows you to reclaim the excess tax within the same tax year, rather than waiting until the end of the tax year.

The process involves completing the appropriate form, depending on your circumstances:

You can submit the relevant form by post or online, with the online option generally being more practical for expats. HMRC may take several weeks to process the claim, and overseas claims can take longer. Ensuring HMRC holds your correct overseas address and bank details can help avoid delays.

The Money Purchase Annual Allowance (MPAA)

Taking a UFPLS payment that includes taxable income will normally trigger the money purchase annual allowance (MPAA), although certain small-pot lump sums (up to £10,000) are excluded.

Once triggered, the MPAA reduces the maximum amount that can be contributed to defined contribution pensions from £60,000 to £10,000 per tax year. This limit applies to:

• Your own contributions (subject to your relevant earnings), and
• Any employer contributions

For example, if your earnings are £8,000 in a tax year, your total pension contributions cannot exceed £10,000, meaning employer contributions would be limited to £2,000.

The MPAA is triggered in circumstances including:

• Taking a UFPLS payment that includes taxable income.
• Receiving taxable income through flexi-access drawdown.
• Taking certain lump-sum payments that exceed the small-pot exemption.

If you only take tax-free pension benefits and leave the remaining funds invested, the MPAA is not normally triggered. As the MPAA restriction is permanent, UFPLS withdrawals should be planned carefully to avoid unintended long-term consequences.

Impact of UFPLS on Future Pension Planning

While UFPLS offers flexibility and simplicity, it can also have lasting implications for future pension planning.

Once a taxable UFPLS payment is taken and the Money Purchase Annual Allowance is triggered:

• Future tax-efficient pension contributions are permanently restricted.
• The reduced allowance applies across all defined contribution pensions.
• The restriction may affect future employment or return-to-UK planning.

This is particularly relevant for expats who:

• Expect to return to the UK later in life.
• Plan to resume employment.
• Intend to continue building pension savings alongside other investments.

UFPLS withdrawals should therefore be assessed as part of a longer-term retirement strategy, rather than viewed purely as a short-term income solution.

What Should Expats Consider Before Making UFPLS Withdrawals?

Regardless of your current country of residence, you should consider the following before utilising UFPLS:

1. Residence and local tax treatment
2. Double tax treaties
3. UK withholding tax and timing
4. Personal allowance availability for non-UK residents
5. Currency risk exposure
6. Inheritance tax (IHT) and estate planning

Residence and Local Tax Treatment

Your UK tax liability in relation to UFPLS withdrawals primarily depends on your tax residence status, which is determined annually under the Statutory Residence Test (SRT).

UK tax residence is determined annually under the Statutory Residence Test (SRT), which consists of three parts:

1. The automatic overseas tests
2. The automatic UK tests
3. The sufficient ties test

Separate split-year rules may apply when an individual moves into or out of the UK during a tax year.

If you spend 183 days or more in the UK in a tax year, you are automatically treated as a UK tax resident. Otherwise, you may still be UK resident if you:

• Do not meet the automatic overseas tests, and
• Meet either one of the automatic UK tests or the sufficient ties test

UK tax residents are subject to the standard UFPLS taxation rules, under which normally up to 25% of each withdrawal may be paid tax-free, with the remainder taxed as income.

If you are not a UK tax resident, the ultimate tax treatment will depend on the rules in your country of residence, although UK pension providers will normally apply PAYE to UFPLS payments unless HMRC has approved treaty relief in advance.

UFPLS taxation for non-UK residents can vary significantly between jurisdictions. For example, UK pension income is generally taxable in Spain and must be reported under IRPF, while countries such as the UAE do not currently levy personal income tax on pension income.

If you are non-UK resident, it is essential to review the local tax treatment in your country of residence before making UFPLS withdrawals. Professional advice may be required to avoid unintended double taxation or reporting failures.

Double Tax Treaties

If you are resident outside the UK and subject to tax on pension income in your country of residence, you should check whether that country has a double tax treaty (DTT) with the UK.

Many UK double tax treaties broadly follow the OECD model, under which taxing rights on private pensions are generally allocated to the country of residence. However, the treatment of pension lump sums can vary by treaty and should be reviewed on a country-by-country basis.

Where a treaty allocates taxing rights to your country of residence, you may apply for relief at source using the DT-Individual form. This typically requires information on:

• Your country of residence.
• Your UK residence status.
• Confirmation of tax residence from the overseas tax authority.

Obtaining relief at source can be time-consuming for expats, particularly where overseas tax authorities are involved. Applications should therefore be made well in advance of any planned UFPLS withdrawal.

UK Withholding Tax and Timing Considerations for Expats

Even where a double tax treaty allocates taxing rights on pension income to your country of residence, UK pension providers will generally deduct UK income tax under the Pay As You Earn (PAYE) system unless HMRC has approved treaty relief at source in advance.

This creates an important timing consideration for expats using UFPLS.

Key points to consider:

• UK income tax may be deducted before treaty relief is applied.
• Treaty relief is not automatic.
• Approval can take several months, particularly for overseas residents.
• Without relief at source, you may need to reclaim UK tax or offset it against local tax liabilities.

UFPLS withdrawals should therefore be planned well ahead of time to avoid unexpected cash-flow issues or administrative delays.

Personal Allowance Availability for Non-UK Residents

Non-UK residents are not automatically entitled to the UK personal allowance, which can materially affect the taxation of UFPLS withdrawals.

Eligibility for the personal allowance depends on factors such as:

• UK nationality
• Residence in certain EEA or treaty countries
• The terms of an applicable double tax treaty

If the personal allowance is not available, the taxable portion of a UFPLS withdrawal may be subject to UK income tax from the first pound, even where total income would otherwise fall below the standard UK allowance.

Before making withdrawals, expats should confirm whether they remain entitled to the UK personal allowance, as this can significantly affect the net amount received.

Currency Risk Exposure

UFPLS withdrawals are paid in sterling, exposing expats to:

• Exchange rate fluctuations: GBP’s value may undergo considerable short-term fluctuations against the currency in your country of residence, which may affect the effective amount of funds you receive.
• Conversion costs: Banks and payment providers typically charge a foreign exchange margin or a flat fee for converting GBP to your local currency, which must be factored in before making any withdrawals.

These risks increase with larger withdrawals. Monitoring exchange rates in advance and understanding conversion charges can help reduce unnecessary costs.

Some pension providers may not be able to pay benefits directly to overseas bank accounts. In such cases, maintaining a UK bank account as an intermediary may be necessary.

Inheritance Tax (IHT) and Estate Planning

As per the current UK regulations, unspent pension funds are typically not counted toward the deceased’s estate from the perspective of IHT. If death occurs before the age of 75, beneficiaries may claim the funds without taxation. In the event of death after the age of 75, withdrawals are taxed at the beneficiaries’ marginal tax rates.

However, the UK government announced significant changes to the related rules, which are set to take effect on 6 April 2027. Under the current proposals, the most notable changes are as follows:

• Unused pension funds and certain death benefits may be brought into the scope of inheritance tax.
• The favourable tax treatment of death before age 75 may be removed.
• Pension funds could be subject to inheritance tax at up to 40%, depending on the final legislation.

These changes will be applicable regardless of your residency, so you must consider them if you wish to include your pension in your estate plan.

One possible planning approach may involve phased access to pension funds, although this should be assessed carefully in light of income tax and longer-term planning considerations.