How to start accessing your pension the right way

If you’ve never heard of UFPLS or have no idea what it means, you’re almost certainly in good company. Even if you're familiar with it, you might not be crystal clear about how it works.

Either way, it’s one of several examples of the messy jargon and jumbled acronyms littered throughout the pension landscape that can make retirement planning tricky.

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I’ll unpack the details shortly, but UFPLS, which stands for uncrystallised funds pension lump sum, along with flexi-access drawdown (shortened to FAD, but I’ll stick with the longhand version for this article) are two of the main options to access your pensions in a flexible way. They allow you to take income and/or lump sums while keeping the remaining funds invested and preserved for a later date.

Beyond the parallels between the two strategies, there are stark differences too. And understanding these really does matter. Failing to discern drawdown from UFPLS when dipping into your retirement savings could land you with an unwanted tax bill, restrict pension tax relief on future contributions and squeeze your options for tax-free withdrawals.

Let’s examine how they stack up and also flag a further consideration: the small pot pension rules.

The advent of freedom and choice

Both flexi-access drawdown and UFPLS were introduced in April 2015 as part of the pension freedom and choice reforms, George Osborne’s great retirement revolution. The then-chancellor essentially allowed everyone to access their pensions however they wish from age 55 (a threshold that’s rising to 57 in 2028).

Before the freedoms, most people bought a guaranteed income with their defined contribution (DC) pension in the form of an annuity. Between 2011 and 2015, you could access your pot flexibly, but only if you had certain amount of guaranteed income – otherwise you faced a limit on withdrawals linked to government actuarial department rates. These were called flexible and capped drawdown.

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As part of the 2014 reforms, flexible drawdown was scrapped and, in its place, came flexi-access drawdown and UFPLS. Capped drawdown, meanwhile, remained but closed to new entrants.

In the past 11 years the popularity of flexi-access drawdown has surged, overtaking annuities to become the most popular method to draw retirement income. UFPLS is also gradually finding favour with retirees, with numbers doubling in Q1 2025 compared to Q1 2021.

So, how do UFPLS and FAD work?

Flexi-access drawdown is a way of keeping your money invested in retirement and making flexible withdrawals whenever you wish, whether that’s one-off lump sums or a stream of regular income.

You can move some or all your pension pot into flexi-access drawdown and take up to 25% (capped at £268,275 of your total savings) as a tax-free lump sum. While you’re able to draw income or one-off lump sums immediately, you don’t have to. Once you do, they will be taxed at your marginal rate during the tax year in question.

UFPLS is way of accessing your pension flexibly without having to commit to either flexi-access drawdown or an annuity. The first 25% is tax-free, while the remainder is taxed at your marginal rate. UFPLS is allowable as a single lump sum and to provide a regular income and can be used to fully encash your savings.

So, if you had £300,000 in your pension and made a £30,000 UFPLS withdrawal, you pay no tax on the first £7,500, while £22,500 is added to other income and taxed at your marginal rate. The leftover £270,000 stays in the pension undrawn.

How your choice can impact future pension funding

Another fiendish piece of pension jargon is the money purchase annual allowance, or MPAA for short, which reduces the amount you can pay into pensions every year and qualify for upfront tax relief from £60,000 to £10,000.

Crucially, the MPAA is triggered by a flexible and taxable pension withdrawal, such as UFPLS or income from flexi-access drawdown. However, if you’ve moved savings into flexi-access drawdown but have only drawn tax-free cash, the MPAA doesn’t kick in. It also isn't activated if you buy an annuity or access a defined benefit (DB) scheme.

This is important to grasp if you want to access your pension but plan to carry on making contributions; especially if you hope to pump in larger amounts at some point, as not only does triggering the MPAA reduce your annual pension allowance, but you can no longer carry forward unused allowances from previous tax years.

An example of UFPLS v flexi-access drawdown when needing a lump sum

Knowing the difference between flexi-access drawdown and UFPLS is particularly important if you need to draw a lump sum from your pension but are still working and don’t require any income. Here’s an example.

Emma has a self-invested personal pension (SIPP) worth £500,000 and needs lump sum of £25,000 to clear expensive debt. She’s still working and pays higher-rate tax and doesn’t need any income right now.

One option is to move £100,000 into drawdown, taking £25,000 (25%) as a tax-free lump sum. The leftover £75,000 stays invested in a drawdown pot, which she can leave untouched until she retires. When the times comes, the withdrawals from this pot will be added to other income and taxed at her marginal rate.

The remaining £400,000 stays in Emma’s non-drawdown pot, which importantly retains the facility to accumulate and draw 25% tax free.

What’s more, as Emma’s yet to make taxable withdrawal from her SIPP, she hasn’t triggered the MPAA, meaning her annual pension allowance remains at £60,000.

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So, how does the situation differ if Emma opts for a £25,000 withdrawal under UFPLS? As she doesn’t need to commit to either drawdown or an annuity, the remaining £475,000 remains undrawn within her SIPP, retaining a bigger facility than the example above to continue accumulating tax-free cash.

There are, however, some big catches here.

Only the first £7,500 (25%) of Emma’s UFPLS is tax free, with the remaining £18,500 taxed at her marginal rate, which is 40% as she’s in the higher-rate bracket.

This triggers a tax bill of £7,400 (£18,500 x 40%) and means Emma keeps only £18,600 of her £25,000 withdrawal, leaving her short to clear her expensive debt.

Given the tax treatment of UFPLS and Emma’s level of income, an UFPLS withdrawal of just under £36,000 would be required to generate a £25,000 post-tax sum, reducing her pension savings to £464,000.

In addition, as the first UFPLS triggers the MPAA, the most she can pay into pensions annually and get tax relief falls to £10,000 (third-party pension contributions such as those made by Emma’s employer count towards the annual allowance) and she loses the facility to use carry forward relief.

Depending on Emma’s level of income, the taxable portion of the withdrawal may also push her into one of the tax traps.

This example isn’t to say that drawdown trumps UFPLS or vice versa, but one will work better than the other in certain circumstances. It’s about understanding the mechanics, benefits and drawbacks of each strategy and factoring these into your personal tax position and specific goal.

For instance, UFPLS can work well if you’ve stopped working and subsequently haven’t used your £12,570 tax-free personal allowance. By making an UFPLS withdrawal of £16,760, the full amount can be free of tax. That’s because the 75% portion that’s taxable falls within your personal allowance, with the remaining £4,190 (25%) part of your tax-free cash.

UFPLS may also be appealing if you’re a 20% taxpayer when making the withdrawal and aren’t worried about triggering the MPAA.

Don’t overlook the small pots rules

If your intended withdrawal from private pension pots is less than £30,000, there might be another option.

Once you reach age 55 (rising to 57 in 2028), you can take up to three non-occupational ‘small pension pots’ worth £10,000 each – for occupational pensions the number is unlimited.

While small pot withdrawals work in a similar way to UFPLS - 25% tax-free and 75% taxable - they avoid some of the key pitfalls.

First, they don’t trigger the MPAA, enabling you to make a part tax-free, part taxable pension withdrawal and retain the full £60,000 annual allowance. Second, you’re not required to have any available lump sum allowance – in other words, tax-free cash, which as noted higher up is capped at £268,275.

If you home your retirement savings in a single pension but wish to harness the small pot rules, check with your provider as some will allow you to create three separate plans each containing less than £10,000.

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Check what your pension provider offers

Most savers either in retirement or close to accessing their pensions, will at least want the choice between flexi-access drawdown, UFPLS and small pots, even if they don’t use all three. It’s therefore crucial to know what your pension provider offers and understand the costs involved. If your platform doesn’t permit the flexible withdrawal strategy that’s right for you, consider moving your pension elsewhere.

Needless to say, if you’re struggling to navigate the complexities and implications when drawing money from your retirement pot, it’s worth seeking expert advice. The margins can be fine, particularly when accessing your savings for the first time, so make sure you pick wisely.