Yes, you can still take 25% of your pension tax-free. Since 6 April 2024 there is a lifetime cap of £268,275 on the total tax-free cash you can draw across all your pensions combined.1GOV.UK. Tax on Your Private Pension Contributions – Lump Sum Allowance The old Lifetime Allowance was abolished and replaced by this new Lump Sum Allowance, but the basic 25% entitlement survived the overhaul. For most savers the cap changes nothing, because it only starts to bite once total pension savings exceed roughly £1,073,100. If your pot is larger than that, or you hold several pensions, the ceiling matters more than the percentage.
How the £268,275 Cap Works
The Lump Sum Allowance sets a lifetime ceiling of £268,275 on all the tax-free lump sums you receive from registered pension schemes combined.2GOV.UK. Tax When You Get a Pension – What’s Tax-Free Every tax-free lump sum you take is deducted from what remains. Once the allowance is used up, any further lump sum is taxed at your marginal income tax rate.3Universities Superannuation Scheme (USS). Lump Sum Allowance and Lump Sum and Death Benefit Allowance
The 25% rule still applies pot by pot, but only up to that shared ceiling. A pension worth £400,000 produces a tax-free lump sum of £100,000, leaving £168,275 of your allowance available.4MoneyHelper. Tax-Free Pension Lump Sum Allowances If you then draw from a second pot of £800,000, only £168,275 comes out tax-free rather than the full £200,000 the 25% figure would suggest. Any provider paying you a lump sum will ask about earlier tax-free payments to work out what you have left.
When You Can Take It
You can normally access pension savings from age 55. This is the normal minimum pension age and has been in place since April 2010. From 6 April 2028 it rises to 57, so anyone hoping to retire between 55 and 57 after that date needs to plan around the change.5House of Commons Library. Minimum Pension Age
The rise to 57 does not apply to everyone. Members of the armed forces, police, and firefighters keep a protected pension age below 57 through their public service schemes. If your scheme already has a protected pension age written into its rules, that protection may also survive the 2028 change, depending on when you joined and the terms of the scheme.
People diagnosed with a serious illness may be able to access their pension before the minimum age under the serious ill-health lump sum rules, which usually require medical evidence.
Two Ways to Take the 25%
From a defined contribution pension there are two main routes. The choice affects your tax position and, in some cases, how much you can still contribute to a pension afterwards.
Pension Commencement Lump Sum
A Pension Commencement Lump Sum (PCLS) is the most straightforward option. You take up to 25% of a pension as a single tax-free payment. The remaining 75% moves into drawdown or buys an annuity, and income from that portion is taxed in the normal way.6GOV.UK. Pension Commencement Lump Sum (PCLS) – Payments You can take a PCLS from each pension you hold, provided your total tax-free cash stays within the £268,275 allowance. The payment must be made within 18 months of entitlement arising.
Taking only a PCLS and moving the rest into drawdown without withdrawing any taxable income does not trigger the Money Purchase Annual Allowance. That makes it the cleaner option if you plan to keep contributing.
Uncrystallised Funds Pension Lump Sum
An Uncrystallised Funds Pension Lump Sum (UFPLS) works differently. You take a single payment in which 25% is tax-free and the remaining 75% is taxed as income. You can take multiple UFPLS payments over time, each split the same way, drawing money as you need it.2GOV.UK. Tax When You Get a Pension – What’s Tax-Free
UFPLS payments trigger the Money Purchase Annual Allowance, cutting the amount you can contribute to pensions in future.7MoneyHelper. Money Purchase Annual Allowance (MPAA) Providers also tend to apply an emergency tax code, which can lead to an initial overpayment that you then reclaim from HMRC.
Defined Benefit Schemes
Final salary and career average schemes work differently because there is no individual pot with a market value. The scheme uses a commutation factor to convert part of your guaranteed annual pension into a one-off cash lump sum. In effect, you trade a slice of future income for money today.
The factor varies by scheme and often by age. A factor of 12 means every £1 of annual pension you give up produces £12 in cash; a factor of 20 gives you £20. Higher factors are more generous. The formula the scheme uses ensures the resulting lump sum does not exceed 25% of the capital value of your benefits, keeping it within the tax-free rules. Ask for a retirement quote showing exactly how much pension income you would sacrifice, because the numbers can shift as economic conditions change.
The Money Purchase Annual Allowance Trap
Once you flexibly access taxable money from a defined contribution pension, your annual allowance for future pension contributions drops from £60,000 to £10,000. This reduced limit is the Money Purchase Annual Allowance (MPAA), and it applies for every tax year going forward.7MoneyHelper. Money Purchase Annual Allowance (MPAA)
The MPAA is triggered by actions such as taking a UFPLS, withdrawing income from drawdown, or cashing in an entire pot. It is generally not triggered by taking only a tax-free PCLS and leaving the rest invested, or by buying a lifetime annuity. If you are still working and either you or your employer are contributing to a pension, this distinction matters. Even a small taxable withdrawal at the wrong time can lock you into the £10,000 limit permanently.
Higher Limits With Protected Allowances
When the Lifetime Allowance was abolished in April 2024, people who had previously applied for protections did not lose them. Those protections now translate into a higher Lump Sum Allowance, meaning more than £268,275 of tax-free cash.8GOV.UK. Taking Higher Tax-Free Lump Sums With Protected Allowances
The main protections are:
- Enhanced Protection, applied for before April 2009, which prevents new contributions being made to maintain validity.
- Fixed Protection (2012, 2014, and 2016), each linked to the Lifetime Allowance in force when applied for. These also restrict future contributions; further pension savings lose the protection.
- Individual Protection (2014 and 2016), based on the value of your pension savings at a specific date, without restricting future contributions.
If you hold one of these, check it is still valid before taking a lump sum. HMRC provides an online service to do this.9GOV.UK. Check the Protected Allowances on Your Pension Savings Some people who were members of public service pension schemes between April 2015 and March 2022 may also be eligible to apply for Fixed Protection 2016 or Individual Protection 2016 as a result of the public service pensions remedy.
Small Pots Under £10,000
If you have a pension worth £10,000 or less, you may be able to take the whole amount as a cash lump sum under the small pots rules without it counting against your Lump Sum Allowance.10GOV.UK. PTM063500 – Member Benefits – Lump Sums – Trivial Commutation Lump Sum The first 25% is tax-free and the rest is taxed as income. You can use this rule for up to three separate small occupational pension pots, plus an unlimited number of small personal pension pots.
This is useful if you have old workplace pensions from previous jobs that are too small to justify keeping open. Cashing them in this way preserves your main £268,275 allowance for larger pensions, and taking a small pot does not trigger the Money Purchase Annual Allowance either.7MoneyHelper. Money Purchase Annual Allowance (MPAA)
Effect on Means-Tested Benefits
A large tax-free lump sum sitting in your bank account can reduce means-tested benefits. For Universal Credit, the Department for Work and Pensions counts your pension pot as capital if you are currently drawing from it. The first £6,000 is ignored, but anything above that is treated as generating a notional monthly income of £4.35 for every £250 held.11MoneyHelper. 12MoneyHelper. How Do Savings and Lump Sum Payouts Affect Benefits If benefits form part of your income, the timing and size of any withdrawal deserves careful thought.