Tax-free cash from your pension and the lump sum allowances

Most people can take up to 25% of their pension as a tax-free lump sum¹. On a pension worth £60,000, that is up to £15,000 paid to you with no Income Tax deducted². The rest of the pension, the other 75%, is taxed as income when you take it³.

Since April 2015, the pension freedoms have let people with defined contribution pensions take this money flexibly rather than having to buy an income for life with the whole pot⁴. You can take the tax-free portion as one payment, or spread it across a series of withdrawals, and you can leave the rest invested or use it to buy an annuity.

There is a lifetime cap on how much tax-free cash you can have in total: the lump sum allowance of £268,275, which applies across all your pensions combined, not to each pot separately⁵. If you have taken pension benefits in the past, or you hold protection from the old lifetime allowance, your personal limit may be different, and this page explains how.

Tax-free cash: up to 25% of your pension

The starting point is simple: people can usually take up to 25% of their pension as a tax-free lump sum¹. This applies to personal pensions, where MoneyHelper confirms you can take up to 25% as tax-free cash⁷, and to workplace and stakeholder pensions, where nidirect states that all types of pension schemes can pay a tax-free lump sum of up to 25% of the overall value of your benefits, provided the scheme rules allow it⁸.

The 25% is worked out on the value of the pension when you take the money, not on what you paid in. If a whole pension is worth £60,000, you can take up to £15,000 as a tax-free lump sum². Because the share is calculated at the point of withdrawal, a pension that has grown over many years can produce a larger tax-free payment than the contributions alone would suggest.

A few points are worth knowing about how the rule sits within the wider system:

• The tax-free lump sum is a feature of registered pension schemes, and the tax relief the system gives on contributions is measured net of the 25% tax-free share taken in retirement⁹.
• Independent Age confirms you can usually take up to 25% as a tax-free lump sum from each of your pension pots¹⁰, though the total across all pots is capped, as the next section explains.
• Debt charities including National Debtline describe the same right: you can take up to 25% of the value of your pension pot as a tax-free sum¹¹.

The rules on how pensions are accessed, including this tax-free share, were set by the pension freedoms introduced in April 2015⁴. Before that date the options were more limited, and the 25% tax-free lump sum was one of the features carried forward into the new framework.

The lump sum allowance: £268,275 across all your pensions

The 25% rule on its own would allow someone with a very large pension to take a very large tax-free payment. To cap this, there is a lifetime limit on tax-free cash called the lump sum allowance, set at £268,275 for most people⁵. The figure appears in the official rates and allowances tables published by HM Treasury⁶, and it was introduced on 6 April 2024 when the old lifetime allowance was abolished¹².

The key point is that the allowance is a single pot of tax-free cash for your whole life, covering all your pensions together. Which? describes it as "set at £268,275 across all your pensions"¹³, and the same wording appears across its guidance on drawdown and cashing in a pension: up to 25% of your pot, up to a maximum of £268,275 across all your pensions¹⁴. So any tax-free cash you take from one pension reduces what is left of the allowance for every other pension you hold.

In practice this means:

• The 25% share is applied to each pension as you take it, but the running total of tax-free cash cannot exceed £268,275⁵.
• Any amount you take above that limit is subject to tax¹².
• The allowance covers tax-free cash taken while you are alive. Lump sums paid after death are measured against a separate, larger allowance, covered later on this page.

For most people the cap will never bind: 25% of a pension would have to exceed £268,275, meaning a pension of well over £1 million, before the allowance itself becomes the limit rather than the 25% share. But the cap matters for people with large pensions, people who have taken tax-free cash before, and people who hold protection that changes their personal amount, as the sections below explain.

When you can take it: age 55, rising to 57 from April 2028

Tax-free cash cannot be taken at any age. Pension Wise states you can take up to 25% from your pension as a tax-free lump sum at any time from age 55, rising to 57 from April 2028⁵. StepChange gives the same minimum: you can usually do this when you turn 55¹⁶.

The age rise is already in legislation. From 6 April 2028, the normal minimum pension age, the earliest point at which private pension money can normally be accessed, goes up from 55 to 57¹⁷. Someone who is 54 when the change takes effect will have to wait until their 57th birthday, unless they have a protected pension age written into their scheme rules.

The age applies to defined contribution pensions, the type where you build up a pot of money. Macmillan confirms that since April 2015 you can take your private pension savings as lump sums if you are aged 55 or over and have a defined contribution pension¹⁸. There are limited exceptions, most importantly taking your pension early because of ill health, where some schemes allow access before the minimum age.

Taking tax-free cash early is not always to your benefit. Which? has calculated that leaving the money invested rather than taking 25% tax-free at 55 could mean being £63,000 better off by 65, based on a pension fund of £500,000 at age 55¹⁹. Money withdrawn early also stops growing, and once taken it may be counted by benefits and means-tested support.

Ways to take tax-free cash: one lump sum or a series of withdrawals

You do not have to take all your tax-free cash in one payment. There are two broad routes.

The first is a single lump sum. Macmillan describes taking all your pension savings in one go, where you usually keep 25% of the money tax-free²⁰. Pension Wise gives the same split for taking your whole pot: when you take a lump sum from your pension, 25% is usually paid tax-free, as long as the total amount of tax-free cash taken stays within the lump sum allowance²¹.

The second is a series of withdrawals, each with a tax-free portion:

• Drawdown: you move money into a drawdown plan, normally taking your tax-free cash at the start, and then draw a taxable income while the rest stays invested.
• UFPLS: you leave the pot untouched and take withdrawals one at a time. Which? describes this route as taking a 25% lump sum of your pension tax-free, with the rest charged at your normal income tax rate²².
• Annuity: when you buy an annuity you can take a tax-free lump sum of up to 25% of your pension pot at the same time⁴.

Whichever route you use, the tax-free portions add up against the same £268,275 allowance. Spreading withdrawals over many years does not create extra tax-free cash; it simply uses the allowance in slices. The comparison page on the lump sum versus UFPLS sets out how the two approaches differ.

Final salary schemes can give more or less than 25%

Everything above describes defined contribution pensions, where you have a pot of money with a value you can point to. Final salary and other defined benefit schemes work differently: nidirect confirms that when you retire you can take some of your pension as a tax-free cash lump sum²³, but the amount is worked out by a formula in the scheme rules, usually based on your salary and years of service, rather than being a flat 25% of a pot.

The result is that some schemes pay more than 25% and some pay less. Which? notes that some pension schemes allow you to take more than the standard 25% as a tax-free lump sum²⁴. Taking tax-free cash from a final salary scheme also usually reduces the pension you receive afterwards, because part of the pot value is converted into the cash payment.

The tax-free cash from a defined benefit scheme still counts towards the £268,275 lump sum allowance in the same way as cash from any other pension. When you request a retirement quotation from the scheme, it will show the lump sum on offer, the reduced pension that results, and how the payment uses your allowance.

The rest of your pension is taxed as income

Only the first 25% is tax-free. Income tax is paid on the remaining 75%³, and Which?'s scheme guidance states that your monthly pension income is taxable under the same rules as your salary, whether you take a lump sum or not²⁵. A pension withdrawal is not a capital gain and does not get capital gains treatment: it is simply income, taxed through the normal bands.

This has practical consequences. A large taxable withdrawal in a single year can push you into the higher rate tax band, so the same money can attract more tax if taken all at once than if it is spread over several years. Which? notes that with drawdown, 25% of your total pension savings is tax-free and any subsequent withdrawals are subject to income tax²². The same article records that many people are overcharged tax on their first withdrawals because of how the emergency tax code is applied, and can claim a refund; the page on emergency tax on withdrawals explains this.

The taxable 75% also counts as income for other purposes, including tax credits and means-tested benefits, while the tax-free 25% does not use up your personal allowance because no Income Tax is charged on it.

If you took pension benefits before 6 April 2024

The lump sum allowance began on 6 April 2024¹². If you took tax-free cash before that date, under the old lifetime allowance rules, those payments still count against your allowances, but the way they are measured changed.

The legislation defines a "transitional lump sum" as a lump sum to which a member of a registered pension scheme became entitled before 6 April 2024 and which is paid on or after that date²⁶. These payments sit across the old and new systems, and HMRC provides a way to record how much tax-free cash you actually used before the change: a transitional tax-free amount certificate. Without one, a standard assumption may be made about your past tax-free cash, which can leave you with less available allowance than you actually have.

For people still taking money under arrangements started before April 2024, Pension Wise confirms the ongoing rule: 25% of other lump sums you take later is tax-free, as long as the total tax-free amount is not higher than 25% of that pension and the lump sum allowance⁵.

Lifetime allowance protection can raise your limits

Before 6 April 2024, tax-free cash was capped by the lifetime allowance: the tax-free lump sum could not exceed 25% of the lifetime allowance limit⁸. The lifetime allowance was £1,055,000 from April 2019, an increase from £1,030,000, which Which? calculated as an extra £24,800 in tax-free pension savings²⁷. When the allowance was abolished, the £268,275 lump sum allowance was set at a level matching 25% of the final lifetime allowance figure.

People who built up large pensions under the old rules could apply for protection, which fixed a higher personal lifetime allowance and, with it, a higher amount of tax-free cash. Which?'s guide to the lifetime allowance and how to protect it explains that the lump sum allowance was introduced on 6 April 2024 and is currently worth £268,275, and that any amount taken above the limit is subject to tax¹². If you hold protection, your personal lump sum allowance is higher than the standard figure, and the same applies to your lump sum and death benefit allowance.

A related limit still applies while you are building up a pension rather than taking one: the annual allowance on the amount you can pay in each year. NHS Scotland's pension guidance warns that if the growth in your benefits exceeds the annual allowance limit, you may be subject to a tax charge, and suggests seeking professional financial advice before a lump sum payment²⁸.

The lump sum and death benefit allowance: £1,073,100

Tax-free lump sums paid after death are measured against a separate, larger allowance. Pension Wise states that the lump sum and death benefit allowance (LSDBA) is £1,073,100 for most people and counts tax-free lump sums taken from your pension before and after you die⁵. The figure appears in the official rates and allowances published at Autumn Budget 2024²⁹.

In practice the allowance works as a single lifetime pool covering both types of payment:

• Tax-free cash you take yourself counts against the £268,275 lump sum allowance, and also reduces the £1,073,100 LSDBA.
• Lump sums paid to your beneficiaries after death draw on whatever remains of the LSDBA.

Which? confirms the effect on beneficiaries: the most a beneficiary can take from all your pensions as a tax-free lump sum is £1,073,100³⁰. Anything paid out above the available allowance is taxed. The rules on what happens to a pension after death, including the tax treatment of different forms of death benefit, are covered in detail on their own page.

Transferring your pension overseas: separate rules apply

Moving your pension abroad does not create a way around the UK allowances. nidirect warns that transferring your pension savings overseas can have tax implications depending on your circumstances and the type of scheme you transfer to³¹.

HMRC's guidance on overseas pensions states that you will still have to pay tax if you exceed the annual allowance or take a lump sum that exceeds your available individual lump sum allowance or individual lump sum and death benefit allowance³². In other words, the allowances follow the money: a transfer to an overseas scheme does not reset the £268,275 cap, and a lump sum taken from an overseas scheme that exceeds your remaining allowance is taxable in the UK. The page on moving abroad covers the wider rules on transfers, including the conditions a receiving scheme must meet.

Where to get free help before taking tax-free cash

Decisions about tax-free cash are hard to reverse. Once the money is out of the pension it stops benefiting from the pension tax rules, and a large withdrawal can create a tax bill that could have been avoided by spreading the payments.

Free, impartial support is available before you commit:

• Pension Wise, the government's free guidance service for people aged 50 and over with a defined contribution pension, explains your options, including how the lump sum allowance applies to your situation⁵.
• MoneyHelper provides free guidance on personal pensions and how tax-free cash works within them⁷.
• A debt charity such as StepChange or National Debtline can help if you are thinking of using pension cash to clear debts, since taking a lump sum can affect benefits and creditor arrangements¹¹.

Paid financial advice is a separate option. Which? looks at whether advice helps with pension planning, including situations where the sums involved or the complexity of your pensions make a professional recommendation worthwhile³³. Advice is not free, but for large pots, protected amounts or defined benefit transfers it is sometimes required by law, as the page on when advice is required to transfer explains.