Pension tax-free lump sums
Important information - What you do with your pension is an important decision that you might not be able to change. You should check you're making the right decision for your circumstances and that you understand all your options and their risks. The government's free and impartial Pension Wise service can help you and we can offer you financial advice if you'd like it. Remember, pension and tax rules can change, and benefits depend on your circumstances. The information on our website isn't personal advice.
25% tax-free lump sum pension rules
You can normally access your pension from age 55 (rising to 57 from 2028). If you have a defined contribution pension (like a Self-Invested Personal Pension), up to 25% can usually be paid to you completely tax free (normally up to a maximum of £268,275), and the rest will be taxed as income. If you have a defined benefit (e.g. final salary) pension, the scheme rules will normally control how much tax-free cash you'll receive and how you can take it.
How do you take pension tax-free cash?
Before you access your tax-free cash, you should consider how much you need to withdraw and what you plan to do with the rest of your pension. Be mindful of how long your pension needs to last.
Take tax-free cash allowance only
You can take your tax-free cash allowance in stages, or in one go. If you are happy with the risk of investing, you can do this by moving portions of your pension into drawdown, taking up to 25% of that amount, and leaving the rest invested. Unless you access your full allowance in one go, up to 25% of what’s left can be taken as tax-free cash later.
Example: The tax-free allowance on a £100,000 pension is usually £25,000. You could move £50,000 into drawdown which would release £12,500 in tax-free cash. Later you could move another £50,000 into drawdown and take another £12,500 tax-free lump sum. To take the full tax-free allowance in one go the whole pension would need to be moved into drawdown with £25,000 taken as a tax-free lump sum, and the remaining £75,000 left invested.
Take tax-free cash with a taxable income
If you want to take your tax-free cash alongside a taxable income you have three main options. You can use drawdown as described above and make taxable withdrawals from your investments after receiving your tax-free cash lump sum. Or you can take your tax-free cash and use what’s left to buy an annuity, which will pay you a taxable income that’s guaranteed for life. Or you can take an Uncrystallised Funds Pension Lump Sum (UFPLS) of which up to 25% of each withdrawal will be tax free and the rest taxable. Once you take a taxable income using drawdown or UFPLS your future pension allowance may be reduced.
Have a plan for your tax-free cash
You're free to spend or save your tax-free cash, however you want. You might decide to use some of it to pay off your mortgage, or to help your loved ones financially. But be mindful that inflation reduces the spending power of cash over time. It's important to consider how much you withdraw, especially if you have no immediate plan for it.
Only taking the proportion you need and leaving the rest in your pension, means it's got a chance to grow tax free, so you could end up with a greater tax-free sum overall. Plus, money left in your pension will usually fall outside of your estate for inheritance tax purposes. (From 2027, where an estate is valued over the inheritance tax threshold, some pensions may be subject to inheritance tax.)
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Beware of pension scams
Fraudsters are becoming more sophisticated, and are targeting people who've withdrawn, or plan to withdraw, money from their pension and other accounts.
Scams can include free pension & investment reviews, the chance to release money early, and they can even persuade people to transfer their pension as part of an investment scam. These scams tend to involve firms and/or investments which aren’t regulated by the FCA, so if you fall victim to them there may be no compensation available. Visit our pension scam hub to find out how to spot a scam, what to do to avoid them, and who to contact if you think you’ve been scammed.
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Guidance from Pension Wise
Pension Wise is a free government service for people getting ready to receive a UK defined contribution pension (this could be a personal or workplace pension).
It offers impartial guidance on pension types, how to access savings, and the tax implications of each option.
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They'll advise you on the best time and methods for accessing your pension.
Advice on your retirement plans
Our financial advisers can help you develop a retirement income strategy, ensuring your investments align with your goals.
They'll advise you on the best time and methods for accessing your pension.