Can I Take 25% of My Pension Tax-Free Every Year?

Yes, you can take 25% of your pension tax-free every year, provided you have a defined contribution pension and you spread your withdrawals rather than claiming the whole tax-free entitlement in a single lump sum. Two withdrawal methods make this possible: uncrystallised funds pension lump sums (UFPLS) and phased drawdown. Both split every withdrawal so that a quarter is paid free of income tax and the rest is taxed as income, up to a lifetime cap of £268,275 in tax-free cash across all your pensions.¹

Most people picture the 25% as one big withdrawal at the start of retirement. It doesn’t have to work that way. The tax-free portion can be sliced off year by year, and that is where the real planning opportunity sits.

The Two Methods That Give You a Tax-Free Slice Each Year

Uncrystallised Funds Pension Lump Sums

With UFPLS, every withdrawal you take from an untouched pension pot is automatically split: 25% arrives tax-free and the remaining 75% is taxed as income.² You can take as many or as few UFPLS payments as you like, whenever you like. Withdraw £10,000 this year, and £2,500 is tax-free while £7,500 is taxed. Do the same next year, and the split is identical.

The appeal is simplicity. You don’t move money into a separate account; you just take what you need, each time getting a quarter tax-free, until either the pot runs out or you hit the lifetime cap. The catch is that taking any taxable amount through UFPLS triggers the money purchase annual allowance, which sharply limits future contributions.

Phased Drawdown

Phased drawdown works from the other direction. Instead of withdrawing from the untouched pot, you move a portion of your pension into a drawdown account. As you move that portion, you receive 25% of it as a tax-free lump sum. The remaining 75% stays invested in the drawdown account, and you take taxable income from it as you need to.³

The next year, you move another portion across and take another 25% tax-free. This can continue for as long as you have uncrystallised funds and available allowance. The benefit over UFPLS is that once money is in drawdown you decide how much taxable income to take each year, which helps you stay in lower tax bands. Many people combine the two, using phased drawdown for a main pot and UFPLS for smaller pensions.

Which Approach Actually Saves You More Tax

Both methods deliver the same 25% tax-free ratio on each tranche. The saving comes from controlling the taxable 75%. Take £40,000 in one year and the £30,000 taxable portion stacks on top of any other income you have, which can push you into higher-rate tax. Split that across two years at £20,000 each, and the £15,000 taxable portion in each year might sit entirely within the basic-rate band. Over a decade of retirement, this pacing can save thousands.

The tax bands to plan around for 2025/26: the first £12,570 of income is covered by the personal allowance, 20% applies up to £50,270, 40% between £50,271 and £125,140, and 45% above that.⁴

When You Can Start

You cannot access your pension before reaching the normal minimum pension age, which is currently 55.⁵ It rises to 57 on 6 April 2028. Anyone born after 5 April 1973 will wait until 57. Those born between 6 April 1971 and 5 April 1973 have a window between their 55th birthday and 5 April 2028 to start withdrawals at 55, after which the new age applies to any remaining uncrystallised funds.

The increase doesn’t affect public service schemes for the armed forces, police, and firefighters. Anyone who held an unqualified right to take benefits before 57 in a scheme as of 3 November 2021 also keeps that right.

The £268,275 Lifetime Cap

Your total tax-free cash across every pension you hold is capped at £268,275 by the lump sum allowance, which replaced the old lifetime allowance when it was abolished on 6 April 2024.¹ Once you’ve taken £268,275 tax-free across the board, every further withdrawal is fully taxable.

For most people with modest to mid-sized pensions, the cap doesn’t bite: it only becomes relevant if total pension savings exceed roughly £1,073,100. But if you hold several workplace pensions from different employers, the totals add up faster than expected. Every tax-free amount you take, whether from a pension commencement lump sum, a UFPLS, or a standalone lump sum, counts toward that single figure.⁶

If you applied for one of the transitional protections when the lifetime allowance was reduced, you may have a higher allowance. Those protections carry over.¹

The MPAA: The Trap That Catches Working Retirees

This is where many people trip up. Once you take taxable money from a defined contribution pension using a flexible option, your annual allowance for future contributions drops from £60,000 to £10,000. That reduced limit is the money purchase annual allowance.⁷

The MPAA is triggered the moment you take a UFPLS, draw income from a drawdown account, or cash in a whole pot. It is not triggered if you take only the 25% tax-free lump sum and leave the rest invested, or if you use the money to buy a guaranteed lifetime annuity.⁸

If you’re still working and your employer contributes to your pension, triggering the MPAA can be costly. The £10,000 limit covers your contributions and your employer’s combined. For anyone planning yearly tax-free withdrawals while still earning, the MPAA is the single most important constraint to plan around.

Emergency Tax on Your First Withdrawal

The first withdrawal from a pension often arrives with a startling deduction. Providers frequently apply an emergency tax code because they don’t yet hold your correct code from HMRC. Under emergency tax, the provider may treat that one withdrawal as though you’ll receive it every month for the rest of the year, pushing the calculation into higher tax bands than your actual income warrants.

The 25% tax-free portion is still paid tax-free. It’s the taxable 75% that gets overtaxed. The overpayment is eventually corrected when HMRC reconciles at year end, but you don’t have to wait. You can reclaim it immediately using HMRC form P55 (if you’ve taken a flexible payment but haven’t emptied the pot), P53Z (if you’ve emptied the pot), or P50Z (if you’ve emptied the pot and stopped working).⁹

Timing helps. Some people make a small initial withdrawal early in the tax year to get a correct code established, then take the amount they actually need once the code is in place.

Small Pots: A Useful Side Route

If you hold a pension worth £10,000 or less, you can usually cash it in entirely under the small pot rules. The same 25/75 split applies: a quarter tax-free, the rest taxed as income.¹⁰ The useful part is that small pot payments do not trigger the MPAA, so future contributions stay uncapped.

You can take up to three small pot lump sums from personal pensions and an unlimited number from different workplace pensions.¹¹ If you’ve collected several small workplace pensions from short stints with various employers, this route lets you clear them out without MPAA consequences.

Don’t Put the Tax-Free Cash Straight Back In

Taking a tax-free lump sum and paying it back into a pension to claim fresh tax relief is called recycling, and HMRC treats it as abuse when all three of these apply: the tax-free lump sum (including any others taken in the past 12 months) exceeds £7,500, the resulting rise in pension contributions over a five-year window is at least 30% of the lump sum, and the arrangement was pre-planned.¹²

If HMRC decides all three conditions are met, the lump sum is reclassified as an unauthorised payment. That triggers a tax charge of at least 40% on the amount, plus a 15% surcharge if the unauthorised payment exceeds 25% of your pension. HMRC looks at a five-year window around the lump sum, so contributions made two years before you took the cash can still be scrutinised.

Defined Benefit Pensions Work Differently

If you have a defined benefit (final salary) pension, the 25% tax-free entitlement still applies, but the mechanics don’t fit the yearly-slice strategy. Your pension is expressed as an annual income, not a pot, so taking tax-free cash means giving up some of that guaranteed income. The scheme applies a commutation factor to convert part of your yearly pension into a one-off sum. A typical factor might be 12:1, giving up £1 of annual pension for each £12 of lump sum, but the rate varies widely between schemes.

You generally cannot take phased withdrawals or UFPLS from a defined benefit scheme. The tax-free lump sum is taken at the point you start drawing your pension, and the income that follows is taxed at your marginal rate for life. The “25% tax-free every year” approach is a defined contribution strategy.

1
GOV.UK. Tax on Your Private Pension Contributions – Lump Sum Allowance
2
GOV.UK. Pensions Tax Manual – Member Benefits: Lump Sums: Uncrystallised Funds Pension Lump Sum (UFPLS)
3
GOV.UK. Pensions Tax Manual – Member Benefits: Lump Sums: Pension Commencement Lump Sum (PCLS): Payments
4
GOV.UK. Income Tax Rates and Personal Allowances
5
GOV.UK. Increasing Normal Minimum Pension Age
6
GOV.UK. Find Out the Rules About Individual Lump Sum Allowances
7
GOV.UK. Pension Tax Limits
8
MoneyHelper. Money Purchase Annual Allowance (MPAA)
9
GOV.UK. Claim Back Tax on a Flexibly Accessed Pension Overpayment (P55)
10
GOV.UK. Tax When You Get a Pension – What’s Tax-Free
11
GOV.UK. Pensions Tax Manual – Member Benefits: Lump Sums: Small Pension Payments
12
GOV.UK. Pensions Tax Manual – Recycling of Pension Commencement Lump Sums: Overview