SSASs offer a huge amount of flexibility when it comes to accessing a pension, as more people look set to do so post the 2024 Autumn Statement, says Caitlin Southall, director at WBR Group.
Pensions have rightly or wrongly been used as Inheritance Tax (IHT) planning vehicles following pension freedoms in 2015. Broadly speaking, tax relief on pension contributions is given on the understanding that the pension will be provided in retirement. With the upcoming changes which will see pensions included in the scope for inheritance tax, we can reasonably expect that an increased number of people will look to access their pension instead of leaving the pot relatively untouched to pass on to the next generation.
SSASs offer a huge amount of flexibility when it comes to accessing a pension. In our experience, SSAS members will typically take their pension commencement lump sum (PCLS) before taking flexi access drawdown. However, taking an uncrystallised funds pension lump sum (UFPLS) also remains a relatively common choice for those looking to access their pension. Whilst many trustees do offer the ability to take UFPLS, not all do.
UFPLS is a lump sum taken from uncrystallised, or funds which have not been designated to pay PCLS and an associated pension. There’s no limit on the number of UFPLS a member can take from their pension with some members taking this as a one-off lump sum, whereas others may take UFPLS incrementally, dependent on their scheme rules and financial needs. It’s a great option which can be used flexibly to manage an individual’s tax affairs.
UFPLS rules can be found under Section 166(1) and paragraph 4A(1)(a) schedule 29 of the Finance Act 2004.
The exact mechanism’s for taking UFPLS is dictated by the scheme rules. UFPLS payments are usually made up of 25% tax free, with the remaining 75% taxed at the member’s marginal tax rate. This is on the basis that the tax-free element does not exceed the permitted maximum. As a reminder, the permitted maximum is the lower of:
- the member’s available lump sum allowance
- the member’s available lump sum and death benefit allowance
If the permitted maximum is exceeded by the tax-free element of the UFPLS payment, the amount by which the permitted maximum is exceeded is taxed as pension income at the member’s marginal rate.
It’s important to remember that taking UFPLS will trigger the MPAA (£10,000 for the 2025/2026 tax year) and is also subject to the normal minimum pension age (NMPA) which is currently age 55, rising to 57 in April 2028.
Members looking to take an UFPLS must have sufficient LSA and LSDBA remaining to support the payment – although only the tax-free element of the UFPLS will be tested against the remaining limits. There are also additional criteria to take an UFPLS payment, including a requirement for any UFPLS payment be paid on or after 6 April 2015 in relation to a money purchase arrangement that is not a collective money purchase arrangement. Members cannot take UFPLS from a collective money purchase arrangement.
Additionally, there are limitations around taking a tax-free lump sum from a pension credit following a pension sharing order. Members can’t take PCLS or UFLPS from any disqualifying pension credit element of their pension – for example, any pension credits created from funds which the original member had crystallised. UFPLS also cannot be taken for any members who have enhanced or primary protection with entitlement to a lump sum in excess of £375,000. For advisers with clients going through a divorce, it’s important to take this into account as it will impact their pension access options.
Taking an UFPLS can cause members to be pushed into a higher tax bracket, so advice should be sought before taking an UFPLS to ensure any tax planning is maximised and takes into account a holistic view of the member’s assets and income. Any tax payable on UFPLS is typically dealt with through PAYE.
It’s important to remember with SSAS that all decisions relating to the scheme must be agreed by all trustees. Therefore, if one SSAS member wishes to take UFPLS, the other trustees must unanimously approve. Documenting these decisions is highly recommended and can avoid disputes at a later date. Liquidity is another factor for a SSAS, and assets may need to be sold in order to support any member accessing their pension which again will require unanimous trustee agreement.
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