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Understanding the Modelling of Uncrystallised Funds and the Lump Sum Allowance (LSA)

Summary

  • Uncrystallised funds are pension funds within a Self-Invested Personal Pension (SIPP) that have not yet been crystallised.
  • Timeline Planning models crystallisation events where these funds are tested against the member’s available Lump Sum Allowance (LSA).
  • The platform supports different crystallisation scenarios, such as full crystallisation or phased withdrawals.
  • Examples illustrate how tax-free cash and taxable income are calculated.

Description

In retirement planning, understanding uncrystallised funds and how they interact with the Lump Sum Allowance (LSA) is essential. Within Timeline Planning, crystallisation events are modelled to provide a clear projection of pension outcomes. This article explains how uncrystallised funds are treated, particularly in relation to planned withdrawals and the tax-free cash available under the LSA.

Withdrawals from Uncrystallised Funds

Withdrawals from uncrystallised funds are treated as crystallisations. When funds are crystallised, up to 25% of the crystallised amount may be taken tax-free, subject to the member’s remaining LSA. The remaining 75% is treated as taxable income and taxed at the member’s marginal income tax rates.

The model supports either phased crystallisations (smaller, staged amounts) or a single Pension Commencement Lump Sum (PCLS). Income tax is calculated on the taxable portion in line with prevailing UK income tax bands.

Examples of Crystallisation with PCLS

Example 1:
John has £400,000 in his uncrystallised account with his full £268,275 LSA available. Crystallising the entire account, John receives £100,000 tax-free and pays £121,203 in income tax (using most recent tax rates and bands), leaving him with £278,797 after tax. His remaining LSA reduces to £168,275.

Example 2:
John has £400,000 but only £50,000 of available LSA. He crystallises £200,000, receiving £50,000 tax-free. The remaining £150,000 is subject to income tax (using most recent tax rates and bands of £53,703. His remaining LSA reduces to £0.

Conclusion

We hope this article and its examples help clarify how uncrystallised funds and the Lump Sum Allowance (LSA) are modelled in Timeline Planning. Our aim is to simplify the current UK pension tax framework and provide clarity and confidence when planning retirement income.