UFPLS & FAD - Whats the real difference?

[Sideous]

I have been reading lots of stuff regarding UFPLS and FAD with from my reading the only difference being when the MPAA is triggered. Am I missing something?

FAD = You crystalise some or all of your pension with 25% of that being tax free. Any money you don't take is left in a FAD account and invested.
UFPLS = You take all or some of your pension with 25% of that being tax free. Any money you don't take is left in your Pension and invested.

In both cases you can take 25% tax free, and in both cases any money you don't take is invested. The only difference being in FAD you can just take the tax free element so MPAA is not triggered. In UFPLS you have to take money that is both taxed and tax free so the MPAA is triggered.

So if you need take / need both taxed and tax free money to get the income you need both UFPLS and FAD are exactly the same.

Is that correct or am I missing something?

Thanks

[Urbandreamer]

So if you need take / need both taxed and tax free money to get the income you need both UFPLS and FAD are exactly the same.

Is that correct or am I missing something?

Thanks

Yes you are missing the concept of investment returns caused by a different tax treatment.

If you take your "pension commencement lump sum", you have taken that out of the pension scheme. Any interest, capital gains or dividends this sum produces in the future may be subject to tax. It could also be subject to IHT in the event of your death. (FAD case)

If however each payment consists of 25% tax free and 75% subject to income tax (UFPLS), then the remainder of the scheme is protected from such taxes until you take your next payment. And so on. This allows the bulk of the scheme to continue to benefit from compound growth without taxation. Over any significant time this should lead to greater returns, or allow the capital to last longer.

In essence it can make sense to take your "pension commencement lump sum" at the start to pay off your mortgage (FAD), while if you have no good reason to spend a large amount early in retirement then it probable makes sense to postpone the change in taxable status of that proportion of your scheme (UDPLS).

[martinc]

in both cases any money you don't take is invested

Not so for UFPLS, the whole amount is taken as cash. 25% tax free, 75% taxable. There is no drawdown account.

You don't have to take everything in one UFPLS, e.g. take £16000 and £4000 is tax free, £12000 is your tax-free allowance etc.

[genou]

I
FAD = You crystalise some or all of your pension with 25% of that being tax free. Any money you don't take is left in a FAD account and invested.
UFPLS = You take all or some of your pension with 25% of that being tax free. Any money you don't take is left in your Pension and invested.


Is that correct or am I missing something?

Thanks

You are missing the ( abolition of the ) LTA. UFPLS leaves behind a pension fund which is 100% uncrystallised. FAD leaves behind a fund which is to some extent ( including 100% ) crystallised. With LTA / BCEs it creates a potentially important difference. Absent LTA, probably nothing as you say.

[airbus330]

Just a small additional info.
I was taking UFPLS for a few years, which as described just takes a lump sum of which 25% is tax free. The remaining 75% is taxed at source by the Pension Provider and can be accounted for in Self Assessment. Everything remaining in the pension stays the same.
If you make a partial FAD, you can take the 25% Tax free element in cash, the remaining 75% can remain invested but moves from an Accumulation Account into a Drawdown Account which may attract a different fee structure. You end up with 2 accounts and in my case the 75% moved "in specie" into the new Drawdown Account. Its not a big deal but it changes how your pension looks.
Adding to the confusion, I have this year asked them to provide me with £16666 of which 25% would be tax free and the remaining 75% (£12500) taxable (ie my Personal Allowance). What Aviva insist on doing is taking the tax free element from the Accumulation Account and the Taxable portion from the Drawdown account. I am presuming that in fact they will remove £16666 from the Accumulation Acc, transfer the remainder to the Drawdown Account, then pay the sum out to me. I don't actually know how it will pan out and they had no explanation for why this has to be done, but it was annoying as it meant that I had to sell more units of a particular investment than I'd have liked. UFPLS on the other hand was a straightforward withdrawal from the accumulation account. BUT, once you have made a FAD transaction UFPLS is unavailable, presumably because a Crystallisation event has occurred. This might be a big deal but, Once again, Aviva staff were unable to offer a concrete explanation of the rules, so I don't know if this is an HMRC rule or an Aviva one. It is very annoying how poorly trained Aviva staff are and I suspect it is probably true of many pension providers.

[swill453]

Just a small additional info.
I was taking UFPLS for a few years, which as described just takes a lump sum of which 25% is tax free. The remaining 75% is taxed at source by the Pension Provider and can be accounted for in Self Assessment. Everything remaining in the pension stays the same.
If you make a partial FAD, you can take the 25% Tax free element in cash, the remaining 75% can remain invested but moves from an Accumulation Account into a Drawdown Account which may attract a different fee structure. You end up with 2 accounts and in my case the 75% moved "in specie" into the new Drawdown Account. Its not a big deal but it changes how your pension looks.
Adding to the confusion, I have this year asked them to provide me with £16666 of which 25% would be tax free and the remaining 75% (£12500) taxable (ie my Personal Allowance). What Aviva insist on doing is taking the tax free element from the Accumulation Account and the Taxable portion from the Drawdown account. I am presuming that in fact they will remove £16666 from the Accumulation Acc, transfer the remainder to the Drawdown Account, then pay the sum out to me. I don't actually know how it will pan out and they had no explanation for why this has to be done, but it was annoying as it meant that I had to sell more units of a particular investment than I'd have liked. UFPLS on the other hand was a straightforward withdrawal from the accumulation account. BUT, once you have made a FAD transaction UFPLS is unavailable, presumably because a Crystallisation event has occurred. This might be a big deal but, Once again, Aviva staff were unable to offer a concrete explanation of the rules, so I don't know if this is an HMRC rule or an Aviva one. It is very annoying how poorly trained Aviva staff are and I suspect it is probably true of many pension providers.

That all sounds like it's Aviva that's causing you the issues. My SIPP is with AJBell and they don't force you to have two separate accounts after partial crystallisation. Everything remains invested in a single account and you can still mix and match UFPLS and flexi access as you wish.

Scott.

[airbus330]

Just a small additional info.

That all sounds like it's Aviva that's causing you the issues. My SIPP is with AJBell and they don't force you to have two separate accounts after partial crystallisation. Everything remains invested in a single account and you can still mix and match UFPLS and flexi access as you wish.

Scott.

Thanks for that info. I will investigate AJ Bell. TBH at this point UFPLS and FAD are equally convenient since I am now fully into drawdown income, but I hate the opacity and general ignorance shown by Aviva staff. They have already compensated me twice for admin mistakes. It is purely laziness on my part keeping me there.

[MrFoolish]

My SIPP is with AJBell and they don't force you to have two separate accounts after partial crystallisation. Everything remains invested in a single account and you can still mix and match UFPLS and flexi access as you wish.

Scott.

How does this single account show the crystallised split? Is it as monetary amounts or percentages? Thanks.

[swill453]

My SIPP is with AJBell and they don't force you to have two separate accounts after partial crystallisation. Everything remains invested in a single account and you can still mix and match UFPLS and flexi access as you wish.

How does this single account show the crystallised split? Is it as monetary amounts or percentages? Thanks.

Day to day you don't see the split at all, all holdings and cash are a single pot. The un/crystallised proportions are maintained behind the scenes.

You only see them if you go into the "Manage my pension" section of your account, to crystallise more or make a UFPLS/FAD.

Scott.

[airbus330]

Had a look at the AJ Bell offering. Running the numbers it look like the charges are almost identical for Aviva vs Bell which surprised me. As far as the admin of the SIPP is concerned, Bell looks to be slicker. For those using them, how long do you find it takes to get money in the bank from making the drawdown request? Also, are requests all fully automated via the website?

[swill453]

Had a look at the AJ Bell offering. Running the numbers it look like the charges are almost identical for Aviva vs Bell which surprised me. As far as the admin of the SIPP is concerned, Bell looks to be slicker. For those using them, how long do you find it takes to get money in the bank from making the drawdown request? Also, are requests all fully automated via the website?

From an already crystallised pot, I requested a (fully automated) drawdown on Wednesday 10th April. I can see the money as a pending credit in my current account for Monday 15th.

I already have the payslip showing (lots of) tax deducted etc.

Scott.

[airbus330]

Had a look at the AJ Bell offering. Running the numbers it look like the charges are almost identical for Aviva vs Bell which surprised me. As far as the admin of the SIPP is concerned, Bell looks to be slicker. For those using them, how long do you find it takes to get money in the bank from making the drawdown request? Also, are requests all fully automated via the website?

From an already crystallised pot, I requested a (fully automated) drawdown on Wednesday 10th April. I can see the money as a pending credit in my current account for Monday 15th.

I already have the payslip showing (lots of) tax deducted etc.

Scott.

Thanks for that info. So 5 days from pushing a button to showing as a bank credit incoming. Impressive. Aviva is a minimum 21 days and even that is usually late. I get the feeling Aviva is set up to encourage people to take monthly income FAD or sell you a n Annuity.

[airbus330]

By the looks of it, if I want to half my annual platform fees, I'd be best off moving to Vanguard with its £375 cap. FAD & UFPLS available and no drawdown charges

[tramrider]

By the looks of it, if I want to half my annual platform fees, I'd be best off moving to Vanguard with its £375 cap. FAD & UFPLS available and no drawdown charges

Interactive Investor is relatively cheap for a SIPP in drawdown. I have both an ISA and a SIPP with them, so the total cost is £21.99 a month or £263.88 a year. They take my monthly amount out of my SIPP account around the 20th to 22nd of the month and I receive it in my bank account around the 26th to 28th of the month, depending on weekends and other bank holidays.

Tramrider

[genou]

By the looks of it, if I want to half my annual platform fees, I'd be best off moving to Vanguard with its £375 cap. FAD & UFPLS available and no drawdown charges

You must be holding funds, With shares only ( in practice almost entirely ETFs ) , I pay AJB 162/year for a SIPP and an ISA. I no longer have a dealing account, but at max that added another 42/year.

[airbus330]

By the looks of it, if I want to half my annual platform fees, I'd be best off moving to Vanguard with its £375 cap. FAD & UFPLS available and no drawdown charges

You must be holding funds, With shares only ( in practice almost entirely ETFs ) , I pay AJB 162/year for a SIPP and an ISA. I no longer have a dealing account, but at max that added another 42/year.

Yes, with this particular Aviva pension funds are the only option. So, I was looking at the subsequent costs of transferring the pension in specie or the nearest equivalant, but I guess an ETF equivalent would be possible. I also note that Bell is taking a bit of adverse press at the moment for gating access to certain 'risky' investments. Not a worry with my collection of trackers, but I wouldn't want my more adventureous inclinations limited.

[Sideous]

Thanks to everyone for the responses. Really useful. I recently found these 2 videos on YouTube that explain both UFPLS and FAD in simple terms and also the different pros and cons

UFPLS vs FAD
https://youtu.be/GUOCxRE16dQ?si=M4TQ9cQdmI2JYBbV

How FAD may not be the best approach
https://youtu.be/_EgTvpkvDVo?si=rjQSBzhfCpEBQCeU

[Gilgongo]

I too found this all rather confusing. In the end what clarified it for me that if I didn't want an "up front" tax-free lump sum (FAD) to pay off a mortgage, do a world cruise, put into some other investment vehicle, etc., then UFPLS drawdown was the way to go.

Maybe that's over-simplifying it?

[kempiejon]

I too found this all rather confusing. In the end what clarified it for me that if I didn't want an "up front" tax-free lump sum (FAD) to pay off a mortgage, do a world cruise, put into some other investment vehicle, etc., then UFPLS drawdown was the way to go.

Maybe that's over-simplifying it?

I prefer the upfront tax free lump sum as the fastest way of getting the max of my money away from the potential of changes to pension regulation. Others might prefer the Inheritance tax and bankruptcy protection a pension offers to chose to leave more in.

[SebsCat]

I prefer the upfront tax free lump sum as the fastest way of getting the max of my money away from the potential of changes to pension regulation. Others might prefer the Inheritance tax and bankruptcy protection a pension offers to chose to leave more in.

For sure, do not discount potential changes to legislation. With the maximum tax free lump sum amount (the Lump Sum Allowance) being divorced from the now-abolished LTA, it is going to be a lot easier for Chancellors to not only allow it to wither in real terms but also to actively reduce the amount. Say, for instance, that Labour were silly enough to bother with reintroducing the LTA, they could now keep the LSA as a separate feature and do something like increase the LTA to a less problematic £2m but decrease the LSA to £200k as political cover.

Of course, the opposite could occur and a Chancellor could actually commit to increased the LSA in line with inflation. Stranger things have happened!

Anyway, something to think about if you are going to have a potential TFLS near to the LSA.