Taking lump sums from your pension (UFPLS)

An uncrystallised funds pension lump sum, usually shortened to UFPLS, is a way of taking money directly out of a pension pot that you have not yet touched. It was introduced on 6 April 2015 as part of the pension freedoms¹. Each time you take one, a quarter of the payment is normally tax-free and the remaining three quarters is taxed as income².

The attraction is simplicity: there is no need to set up a drawdown plan or buy an annuity first. You ask your pension provider for a payment, and the money comes out of the pot with tax deducted automatically through the PAYE system³. You can take as much or as little of your untouched funds as you like, as often as you like, subject to the eligibility conditions¹.

The trade-offs are real, though. Taking taxable money from a defined contribution pension cuts the amount you can save into a pension each year with tax relief from £60,000 to £10,000⁴, the first payment is often taxed using an emergency tax code that can take too much¹, and money left in the pot stays invested, so its value can fall as well as rise. This page explains how a UFPLS works, what it costs in tax, and who it tends to suit.

What an uncrystallised funds pension lump sum is

"Uncrystallised" simply means untouched: money in a pension that you have not yet used to take any benefits. A UFPLS is a way of taking benefits from that pot without first converting it into a drawdown fund or an annuity¹. Instead of designating part of the pot as tax-free cash and part as income, you simply draw money out, and each payment is split for tax purposes at the point it is paid.

The rules allow you to take as much of your uncrystallised or unused funds as a UFPLS as you like, subject to the eligibility conditions¹. That means a UFPLS can be a one-off payment, a series of payments spread over years, or a way of draining the pot entirely. The pot stays invested between withdrawals, so what remains can grow or shrink depending on how the investments perform.

There are conditions. You can only opt for a UFPLS if you have not already taken all of your tax-free cash from the pension³. If your pension contains money that came from an ex-spouse following a divorce, known as a pension credit, and tax-free cash is not allowed from those funds, a UFPLS can only be taken from the value of the pension not represented by the pension credit¹. And if you have a protected entitlement to more than 25% tax-free cash, taking a UFPLS may mean losing that higher entitlement on any remaining uncrystallised funds, because the tax-free element of a UFPLS is fixed at 25%¹.

A UFPLS is one of several ways to use a defined contribution pot. The others, including drawdown and annuities, are compared later in this page, and the full set of choices is covered in your options for taking money from a pension.

Each withdrawal is 25% tax-free and 75% taxed as income

The defining feature of a UFPLS is how each payment is split. Usually 25% of each withdrawal is tax-free, with the rest charged at your normal income tax rate³. Every withdrawal is split into 25% tax-free cash and 75% taxable income⁸.

This split happens payment by payment, which is what separates a UFPLS from the alternatives. If you move your pot into drawdown and take your tax-free cash up front, all of that cash comes out tax-free in one go and later income payments are fully taxable. With a UFPLS, the tax-free element is spread across every withdrawal, so each payment is part tax-free and part taxable².

The tax-free element is also restricted by how much of your lifetime allowance for tax-free cash you have left: it is limited to your remaining lump sum allowance or the value of the UFPLS, whichever is smaller, and the rest is taxed as income¹.

How tax on a UFPLS works, with a worked example

Because three quarters of each withdrawal counts as taxable income, the amount of tax you pay depends on your other income in the same tax year. Income tax is paid on the remaining 75% of a lump sum⁹.

A worked example from Which? shows the mechanics: if you take a £20,000 lump sum, £5,000 of this would be tax-free and £15,000 would be treated as income⁴. If you do not have any other sources of income, the first £12,570 of that £15,000, your personal allowance, will be tax-free, meaning the remaining £2,430 will be taxable⁴. In that situation, only £2,430 of the whole £20,000 is actually taxed.

The picture changes if you have other income. The taxable 75% is added on top of your earnings, the State Pension and any other pension income for the year, so a large lump sum can push part of it into the 40% or 45% band. A single large payment taxed at your current income tax rate of 20%, 40% or 45% can produce a much bigger tax bill than the same money drawn in smaller amounts over several tax years¹⁰.

That is why the timing and size of withdrawals matters. Spreading withdrawals across tax years, and keeping them within unused personal allowance and basic rate bands, can legally reduce the tax due. Nothing in the rules requires you to take the money in one go: you can take as much as you like, as often as you like¹.

Tax is collected automatically. If you take a UFPLS, tax should be automatically deducted by your pension company through the PAYE system³. How pension income is taxed generally is covered in tax on pension income.

The lump sum allowance: up to £268,275 tax-free in a lifetime

The 25% tax-free share of each withdrawal is not unlimited. The total tax-free cash you take from all your pensions is capped by the lump sum allowance, which is £268,275 for most people¹¹. The standard maximum tax-free lump sum is £268,275¹², a figure confirmed in HMRC's published rates and allowances¹³.

The allowance applies across all your pensions combined, not pot by pot¹⁴. Once you have used up £268,275 of tax-free cash, any further lump sum payments are fully taxable as income, even the portion that would normally be the tax-free 25%¹.

For most people the cap is generous: £268,275 of tax-free cash corresponds to a quarter of a pension pot of just over £1 million, which is beyond what most people hold. But it matters if you have a large pot, several pots, or a protected entitlement to a higher tax-free percentage. If you are entitled to more than 25% protected tax-free cash and you take a UFPLS, the tax-free element is still only 25%, so you lose some of your entitlement¹.

The detailed rules on tax-free cash and the related allowances are covered in tax-free cash from your pension and the lump sum allowances.

Taking a lump sum cuts your pension allowance to £10,000

The most overlooked consequence of a UFPLS is what it does to your future pension saving. The standard annual allowance, the most you can pay into pensions each year with tax relief, is £60,000. But if you take taxable money from your defined contribution pension, such as a single lump sum, that £60,000 limit reduces to £10,000⁵. This reduced limit is called the money purchase annual allowance, or MPAA⁴.

The trigger is taking money beyond your 25% tax-free lump sum¹⁵. The MPAA applies to people who have taken taxable income from a defined contribution pension, and taking a taxable lump sum, known as an uncrystallised funds pension lump sum, is one of the triggers¹⁶. Because three quarters of every UFPLS is taxable income, a UFPLS almost always triggers the MPAA.

Two points of contrast are worth knowing:

• The MPAA is not triggered if you have only taken your tax-free lump sum, for example by moving into drawdown and taking only the 25% tax-free cash⁴.
• The lower limit is also not triggered if you have only taken your 25% tax-free lump sum or used money in your pension to buy an annuity¹⁷.

Once the MPAA applies, you also cannot carry forward any unused allowances from previous years¹⁶, which removes a planning option that would otherwise soften the cut. The full rules are explained in the money purchase annual allowance and pension carry forward.

This matters most for people who plan to keep working and contributing after taking a lump sum. If you are still paying into a workplace pension or a personal pension, a UFPLS can turn a £60,000 annual allowance into £10,000 overnight. If you have finished contributing to pensions altogether, the MPAA has little practical effect.

Who cannot take a UFPLS

The main restriction is about tax-free cash you have already used. You can only opt for a UFPLS if you have not already taken all of your tax-free cash from the pension³. If you have moved a pot into drawdown and drawn the full 25% tax-free amount, that pot can no longer pay a UFPLS, because there is no uncrystallised money left.

Other situations restrict a UFPLS rather than rule it out:

• Protected tax-free cash: if you are entitled to more than 25% tax-free cash, a UFPLS still pays only 25% tax-free, so you lose some of your entitlement on the remaining funds¹.
• Pension credits from divorce: if your pension contains money transferred from an ex-spouse and tax-free cash is not allowed from those funds, a UFPLS can only be taken from the part of the pension not represented by the pension credit¹.
• Lump sum allowance used up: if your remaining lump sum allowance is less than 25% of the payment, the tax-free element is restricted to what is left, and the rest of the payment is taxed as income¹.

A UFPLS is a feature of defined contribution pensions, money purchase schemes where the value of the pot is what you have to draw on. Members of defined benefit and final salary schemes have their own options, including taking a tax-free lump sum in exchange for a reduced pension. In one example, a scheme member with an annual income of £20,000 and a commutation factor of 12 could typically take a tax-free lump sum of £85,714 and be left with an annual pension of £12,857¹⁹.

UFPLS or drawdown: how each one works

A UFPLS and pension drawdown are the two main ways of keeping a defined contribution pot invested while drawing money from it. The difference lies in when the tax-free cash is taken.

With a UFPLS, each payment is split 25% tax-free and 75% taxable as it is drawn². With drawdown, you normally designate the pot as a drawdown fund, take your tax-free cash up front, and then draw taxable income as and when you wish⁴. Pension drawdown allows you to keep your pension invested and draw out income as and when you wish; you can take out as much as you want, although this money will be subject to income tax⁴.

In drawdown, you can ask your provider to choose investments for you based on your preferences, choose your own, or have a financial adviser manage them; the ready-made options are called investment pathways¹¹.

Which tends to suit whom is a matter of circumstance, not recommendation. A UFPLS is simpler, with no need to set anything up, and suits someone taking occasional payments who is happy for the tax-free cash to arrive in instalments. Drawdown suits someone who wants all the tax-free cash at once, for example to pay off a mortgage, and is comfortable that everything drawn afterwards is taxable. Both keep the pot invested, so both carry investment risk, and both trigger the MPAA once taxable money is taken¹⁶. The comparison is explored in tax-free lump sum vs UFPLS.

Taking a whole pot or a small pot in one go

A UFPLS can be used to take an entire pot in one payment. 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 your allowances, and the other 75% counts as earnings for Income Tax⁵. Taking the whole pot as a lump sum is one of the recognised options under the pension flexibilities²⁰.

Taking everything at once has a tax consequence: the taxable 75% is added to your income for the year in a single block, which can push much of it into higher tax bands. Spreading the same withdrawals over several tax years can reduce the total tax, though the money left invested remains at the mercy of the markets in the meantime.

There are special rules for small pots:

• You can take a whole pension pot worth up to £10,000 as a lump sum⁷. In most schemes you can take 25% of your pension pot as a tax-free lump sum⁷.
• Any occupational pension scheme where the value is £10,000 or less can have its benefit taken as a small pot lump sum²¹.
• If the total value of all your pension pots is less than £30,000, you may be allowed to take this as a lump sum under trivial commutation²¹.

Small pot and trivial commutation payments have their own tax treatment, which can differ from the standard 25% split, so it is worth confirming with the scheme how a small pot will be taxed before taking it. The choices for smaller pots, including whether to combine them, are covered in combining pension pots or keeping them separate.

How to take a lump sum from your pension

The process is straightforward, but a few checks before you ask for the money can save tax and fees.

1. Check what you have. Find the value and type of each pot. Lost pots can be traced through the Pension Tracing Service, and the pensions dashboard scheme is intended to bring them together in one place. Even after taking UFPLS payments, members who remain active or deferred members stay in scope to be shown their accrued pension information, based on the remaining value of their pension²².
2. Get free guidance. Pension Wise offers free, impartial guidance on your pension options for people aged 50 and over.
3. Ask your provider what it charges. Providers may charge a fee for each withdrawal⁷, and personal pension providers usually take their charges as a percentage of the pension fund²³. Also ask about protected tax-free cash and any pension credits, both of which affect what a UFPLS can pay¹.
4. Request the payment. Tell the provider how much you want. Each payment will be split 25% tax-free and 75% taxable².
5. Tax is deducted automatically. The pension company deducts tax through PAYE³, and the first payment is often taxed using an emergency code.

Watch out for pension scams throughout: unsolicited calls, texts or doorstep visits about releasing pension money are a common opening move, and a legitimate provider will never cold-call you about a UFPLS.

Emergency tax codes and reclaiming overpaid tax

The first UFPLS payment from a provider is often taxed using an emergency rate tax code. If the UFPLS is the first taxable payment you have taken from your pension provider, the provider will normally apply an emergency rate tax code, which assumes the payment is the first in a regular series and can result in underpaying or overpaying tax¹.

An emergency tax code is recognisable by its suffix: if your tax code has a W1, M1 or X at the end, you are on an emergency tax code²⁴. These codes are applied by HMRC when it does not have enough details about how much tax you need to pay²⁵, and they are only a temporary measure²⁵. The code will be written on your payslip, generally near your national insurance number²⁵.

The practical effect is that a month's worth of tax-free allowance, £1,048 per month in the 2025/26 tax year based on the yearly £12,570 personal allowance, is applied to the payment rather than a full year's allowance, which is why the first withdrawal is so often overtaxed⁶.

The overpayment is not lost. Once HMRC has all the information needed to set you on the right tax code, you will be refunded any tax you have overpaid²⁴. The emergency code switches to the right code as soon as HMRC has the right tax information for you²⁶. HMRC will eventually refund the overpaid tax, usually at the end of the tax year, but you can get your money back within 30 days by submitting the relevant form¹³. If your emergency tax code means you have paid too much tax, HMRC will send you a tax rebate²⁵.

The detail of how the codes work and which forms to use is covered in emergency tax on pension withdrawals.

How a pension lump sum can affect benefits

Money taken from a pension does not just affect tax. The general rule is that anything you take out of your pension is treated as income or capital in the normal way, so it may affect means-tested benefits²⁰. A lump sum sitting in your bank account counts as savings, which can reduce or wipe out benefits such as Pension Credit, and money taken as income counts towards income-based tests.

If you claim benefits, or expect to, check the position before taking a lump sum rather than after. The interaction between pension income, lump sums and the benefits system is covered in how pensions affect Pension Credit and other benefits.

Timing can matter as much as the amount. A withdrawal taken in one tax year may be treated differently from the same money spread over several, and money spent or given away can raise its own questions for benefit purposes. Free, independent advice on benefits is available from organisations such as Citizens Advice, and benefits calculators can show what a lump sum would do to your entitlement.

Where to get help and how to complain

Free guidance on your pension options is available from Pension Wise, the government service for people aged 50 and over, and general money guidance is available from MoneyHelper. Guidance explains your options; it does not tell you which to choose. If you want a recommendation tailored to your circumstances, that is financial advice, which is paid for.

Tax questions can be taken to HMRC, and tax charities such as TaxAid publish guidance on how payments from flexible pensions are taxed⁶. If you believe a pension provider has overtaxed a payment or made an error, the first step is to complain to the provider directly.

If the provider does not resolve the complaint, the Pensions Ombudsman can look at it. In most cases, the ombudsman's time limit runs to three years from whichever is later: the event complained about, the date the person became aware of the problem, or the date they should reasonably have become aware of it²⁷. The process is described in the Pensions Ombudsman and complaining about a pension, and provider complaints generally in complaining about a pension provider.