Tax-free cash is the part of a private pension you can take without paying income tax. In most cases it is 25% of the pension, capped across all your schemes by the lump sum allowance of £268,275 unless you hold a protected allowance. You can usually take it from age 55, rising to 57 from 6 April 2028. A wider lump sum and death benefit allowance of £1,073,100 applies to serious ill-health lump sums and certain death benefits. Everything above the tax-free part is taxed as income.
How much you can take
Since the lifetime allowance was abolished on 6 April 2024, two allowances in Chapter 15A of Part 9 of ITEPA 2003 control tax-free lump sums:
| Allowance | Amount | What counts against it |
|---|---|---|
| Lump sum allowance | £268,275 | Pension commencement lump sums, the tax-free 25% of each uncrystallised funds pension lump sum, and stand-alone lump sums |
| Lump sum and death benefit allowance | £1,073,100 | All of the above, plus serious ill-health lump sums and certain lump sum death benefits |
The allowances are personal and apply across all your registered pensions, so you need to add up what you have used in every scheme. Your provider can tell you how much allowance you have used with them. People who hold lifetime allowance protection, for example from the April 2016 reduction, may have higher allowances.
Two ways to take it
From a defined contribution pot there are two main routes, with very different effects.
- Pension commencement lump sum (PCLS). You take up to 25% of the pot, or of the part you are crystallising, as a single tax-free payment. The rest is moved into drawdown or used to buy an annuity. GOV.UK says you then have six months to start taking the remaining 75%;
- Uncrystallised funds pension lump sum (UFPLS). You take cash straight from the pot, and 25% of each payment is tax-free with the rest taxed as income. This spreads the tax-free element across many withdrawals.
A defined benefit scheme also usually lets you take up to 25% tax-free, on terms set by its own rules. Ask the scheme how taking cash would change your annual pension before you decide how much to take.
Worked example
Mark, 62, has a £400,000 defined contribution pot and no other pensions.
- Full PCLS. He takes £100,000 tax-free and moves £300,000 into drawdown. That uses £100,000 of his £268,275 allowance;
- Phased UFPLS. He instead takes £20,000 a year as UFPLS. Each year £5,000 is tax-free and £15,000 is taxable. With no other income, £12,570 is covered by his personal allowance, leaving £2,430 taxed at 20%, which is £486.
For a pot of £1.2 million, 25% would be £300,000, but the tax-free amount is capped at £268,275 unless a protected allowance applies. The balance of any lump sum above the allowance is taxed as income.
Small pots and serious ill health
- Small pots. A pension worth up to £10,000 can usually be taken in one go, with 25% tax-free. You can take up to three of these from personal pensions and an unlimited number from workplace pensions;
- Trivial commutation. If all your private pensions total £30,000 or less, you can usually take a defined benefit or defined contribution pension as a single lump sum, again with 25% tax-free;
- Serious ill health. If you are expected to live less than a year and are under 75, you may be able to take the whole pot tax-free, up to your lump sum and death benefit allowance.
Traps to avoid
- The money purchase annual allowance. Taking a UFPLS, or the first income payment from flexi-access drawdown, cuts your annual allowance for future money purchase saving to £10,000. Taking only a PCLS and leaving the rest in drawdown untouched does not trigger it;
- Recycling. Under paragraph 3A of Schedule 29 to the Finance Act 2004, a PCLS is treated as an unauthorised payment if it causes significantly larger pension contributions and you planned that. The rule does not apply where your PCLS payments in 12 months total £7,500 or less, or where the extra contributions are no more than 30% of the lump sum;
- Overpaid tax. If too much tax is deducted from the taxable part of a withdrawal, claim it back with form P55 (part of the pot taken), P53Z (whole pot taken) or P50Z (whole pot taken and stopped work);
- Early access offers. A lump sum paid before the normal minimum pension age, other than for ill health or under a protected pension age, is usually an unauthorised payment taxed at up to 55%.
Tax-free cash and inheritance tax
From 6 April 2027, most unused pension funds and death benefits come into the estate for inheritance tax. Tax-free cash you have already taken is no longer a pension fund, so it sits in your estate like any other savings unless it is spent or given away. Whether to take it, leave it or gift it is now part of estate planning. Our guide to inheritance tax on pensions explains the April 2027 changes.
Sources: GOV.UK, Tax when you get a pension: what's tax-free, Lump sum allowance, How you can take your pension and Claim a tax refund on your pension by post; ITEPA 2003, section 637P and section 637R; Finance Act 2004, Schedule 29, paragraph 3A; and HMRC's PTM056520. See also how much a pensioner can earn tax-free.
Acumon's private client tax team can model how and when to take tax-free cash alongside your other income. If inheritance tax is a concern, our inheritance tax planning service can look at the estate as a whole.