How much of your pension lump sum is — tax-free?
The tax-free portion of a pension is one of the most valuable perks in the UK tax system. But there's a cap, and knowing how it works changes how you plan withdrawals.
- ▸25% of a defined contribution pension can be taken as a tax-free lump sum, known as the pension commencement lump sum (PCLS).
- ▸The maximum tax-free lump sum is capped at the lump sum allowance of £268,275 — regardless of total pot size.
- ▸Anything withdrawn above 25% (or above the cap) is taxed as income at your marginal rate.
- ▸Taking the full 25% in one go isn't always the most tax-efficient approach — spreading withdrawals across tax years can reduce the overall bill.
The 25% rule (PCLS)
When money is withdrawn from a defined contribution pension, 25% of the amount can be taken tax-free. This is formally called the pension commencement lump sum (PCLS), though most people know it as the "25% tax-free lump sum."
The rule applies from age 55 (rising to 57 from April 2028). It doesn't matter whether the pension is a workplace scheme, a SIPP, or a personal pension — the 25% rule is the same across all defined contribution pensions.
There are two main ways to take the tax-free portion:
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Take it all at once. Enter drawdown, designate the full pot, and withdraw the entire 25% as a single lump sum. The remaining 75% stays invested and any future withdrawals from it are taxed as income.
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Take it gradually via UFPLS. Each uncrystallised funds pension lump sum payment is automatically split: 25% tax-free, 75% taxable. This spreads the tax-free entitlement across multiple withdrawals rather than using it all at once.
The PCLS is not a bonus on top of your pension — it comes out of the same pot. A £200,000 pension with a £50,000 PCLS leaves £150,000, not £200,000 plus £50,000.
The lump sum allowance cap (£268,275)
Before April 2024, the tax-free lump sum was limited by the lifetime allowance. That system was abolished. In its place, the lump sum allowance sets a hard cap of £268,275 on the total tax-free cash any individual can take across all their pensions.
For most people, this cap is irrelevant — it only bites if the total pension pot exceeds roughly £1,073,100 (since 25% of £1,073,100 = £268,275). But for those with larger pots, it means the tax-free percentage effectively drops below 25%.
Example: a pot of £1,500,000. Without the cap, 25% would be £375,000 tax-free. With the cap, only £268,275 is tax-free — the remaining £106,725 that would otherwise have been tax-free is instead taxed as income.
Anyone who held lifetime allowance protections (fixed or individual protection) before April 2024 may have a higher lump sum allowance. The exact figure depends on which protection was registered and when.
What happens above the cap
Once the £268,275 allowance is used up, every further withdrawal is fully taxable as income. There's no partial tax-free element on amounts above the cap.
This has practical consequences:
- Multiple pensions count together. If PCLS is taken from three different pensions over several years, HMRC tracks the cumulative total against the single £268,275 cap. There is no separate allowance per scheme.
- It's a lifetime limit. Unlike the annual allowance, which resets each tax year, the lump sum allowance is a one-off total. Once used, it's gone.
- Exceeding the cap means an income tax charge. Any excess is added to taxable income for the year it's received, taxed at the individual's marginal rate — 20%, 40%, or 45%.
The pension lump sum tax calculator shows the tax due on any given withdrawal, including the impact of the cap.
Spreading withdrawals vs taking it all
Taking the full 25% as a single lump sum in one tax year is simple. But it's not always optimal.
When the remaining 75% is drawn down alongside it, or when other income sources already exist (state pension, rental income, other pensions), a large withdrawal in a single year can push total income into a higher tax band. The income tax retirement calculator models the combined effect.
Spreading withdrawals across multiple tax years — taking smaller amounts each year using UFPLS, for example — can keep each year's total income below higher-rate thresholds. The trade-off is complexity: more withdrawals to manage, and the pot stays invested (and at risk) for longer.
There's no universally correct answer. The right approach depends on the pot size, other income, and whether the money is needed immediately or can wait.
- ▸The maximum tax-free lump sum from pensions is capped at £268,275 under the lump sum allowance introduced in April 2024. [gov.uk]
- ▸25% of a defined contribution pension can be taken tax-free as a pension commencement lump sum (PCLS). [gov.uk]
- ▸The minimum pension access age rises from 55 to 57 on 6 April 2028. [gov.uk]
This is factual information, not financial advice. If you're unsure what's right for your situation, speak to an FCA-regulated financial adviser.