When it comes to taking your 25% tax-free lump sum from a pension, many people rush into it without understanding the full impact. In this video summary, Toby Hines, a UK Chartered Financial Planner, explains why taking that lump sum all at once may not be the smartest move — and introduces a better alternative: UFPLS (Uncrystallised Funds Pension Lump Sum).
Let’s break it down.
Why taking the full 25% tax-free lump sum may be a mistake
Many people automatically take 25% of their pension as a tax-free lump sum as soon as they reach retirement age. Toby argues this may not be wise, especially if you don’t need all that cash at once. Doing so:
- Limits your flexibility in future income withdrawals
- May reduce the total amount of tax-free cash you can get in the long run
- Could lead to inefficient tax outcomes if not planned properly
Instead, he encourages looking at your income needs and tax position first.
What is UFPLS, and why is it better?
UFPLS allows you to withdraw money from your pension pot in chunks — and with each withdrawal:
- 25% is tax-free
- 75% is taxed as income
This means you could spread your withdrawals over several years, accessing the same 25% tax-free benefit each time, but keeping more of your tax allowances and control.
Real example: income gap at 62
Toby shares the story of a man who is:
- 62 years old, retiring next year
- Has a pension worth £250,000 and £30,000 in savings
- Has no other income until state pension at 67 (£12,000/year)
- Needs £20,000 per year to live on
Option 2 (UFPLS – Flexible approach):
- Withdraws £16,760 per year from his pension
- £4,190 is tax-free (25%)
- £12,570 is taxable but stays within personal allowance, so no tax is owed
- Tops up remaining £3,240 from savings
Result: This strategy bridges the income gap to age 67 without draining the entire pension upfront and avoids triggering tax or losing long-term growth potential.
Toby shares the story of a man who retired at 62 and needed income before his state pension kicked in.
Option 1: He could take his full tax-free lump sum and use it to fund his lifestyle for 3 years.
Option 2 (UFPLS): Withdraw money gradually, taking advantage of the tax-free portion and lower-income tax rates.
When compared side-by-side:
- The UFPLS strategy provided more flexibility, preserved more pension pot, and offered better long-term value — especially if the investment pot continued to grow.
Source: Watch the full video from Toby Hines https://www.youtube.com/watch?v=orPwlizKKZ8&ab_channel=TobyHines
Planning vs advice
Toby also draws an important line between getting financial advice and doing proper financial planning:
- Advice may focus on what to do now
- Planning looks ahead, considers future income, tax, risk, and lifestyle
UFPLS is a good example of how planning can save thousands, and avoid costly mistakes like rushing into lump sums.
Final thoughts
Before you take your 25% lump sum, stop and ask: Do I really need all of it now? If not, a strategy like UFPLS could give you:
- More tax-free income spread over time
- Greater flexibility
- Better alignment with your long-term goals
💡 Related: Should you take your pension as a lump sum or regular income?
