Yes, you can take your 25% tax-free pension lump sum in stages if you hold a defined contribution pension and are at least 55. Two methods make this possible: phased flexi-access drawdown, where you crystallise slices of the pot over time and take 25% of each slice tax-free, and uncrystallised funds pension lump sums (UFPLS), where each withdrawal is automatically split 25% tax-free and 75% taxable. The total tax-free cash you can take across all your pensions is capped at £268,275 under the lump sum allowance.1GOV.UK. Tax on Your Private Pension Contributions – Lump Sum Allowance
Who Can Phase the Tax-Free Cash
The right to a pension commencement lump sum of up to 25% comes from the Finance Act 2004.2HM Revenue & Customs. Pensions Tax Manual – Payment of a Pension Commencement Lump Sum The current minimum pension age is 55, rising to 57 on 6 April 2028.3GOV.UK. Increasing Normal Minimum Pension Age If you were born before 6 April 1971 you will already be 57 when the change bites. If you were born between 6 April 1971 and 5 April 1973, you can still access your pension from 55 but must do so before April 2028. Anyone born on or after 6 April 1973 will need to wait until 57.
Phasing is a feature of defined contribution pensions: personal pensions and most workplace money purchase schemes. Defined benefit (final salary) pensions work differently, because the tax-free lump sum is linked to a guaranteed annual income rather than an investment pot you can draw from in slices. To phase tax-free cash out of a defined benefit scheme you would generally have to transfer it to a defined contribution arrangement first, and transfers of pots over £30,000 require regulated financial advice.
Before your provider processes any withdrawal, they must direct you to Pension Wise, the government’s free guidance service.4Financial Conduct Authority. PS21/21: The Stronger Nudge to Pensions Guidance You can opt out, but you will need to confirm in writing that you have either taken the guidance or declined it before the application moves forward.
Method One: Phased Flexi-Access Drawdown
Phased drawdown lets you move portions of your pension into a drawdown account over time rather than committing the whole pot at once.5MoneyHelper. Phased or Partial Pension Drawdown Explained Each time you designate a slice, up to 25% of that slice comes out as tax-free cash. The remaining 75% enters a drawdown fund, stays invested, and can be withdrawn later as taxable income.
Say you have a £200,000 pension and move £40,000 into drawdown. You receive £10,000 tax-free, and the other £30,000 goes into your drawdown fund. The remaining £160,000 stays untouched in its original wrapper, still invested, with no immediate tax consequences. Next year you could crystallise another slice and take another chunk of tax-free cash.6MoneyHelper. Take Money From Your Pension When You Need It: Pension Drawdown Explained
The big advantage is control over the Money Purchase Annual Allowance. Moving funds into drawdown and taking only the tax-free 25% does not trigger the MPAA. You trigger it only when you actually draw taxable income from the drawdown fund.7HM Revenue & Customs. Pensions Tax Manual – Money Purchase Annual Allowance: Trigger Events If you are still working and paying into a pension, that distinction is worth real money.
Providers often set a minimum crystallisation amount, commonly between £1,000 and £5,000 per event. You also need to track every tax-free lump sum you take across all your pensions, because the £268,275 lump sum allowance applies to you personally, not to each scheme.8MoneyHelper. Tax-Free Pension Lump Sum Allowances
Method Two: Uncrystallised Funds Pension Lump Sum
UFPLS lets you take money straight from your uncrystallised pension without setting up a separate drawdown account. Every payment is automatically split: 25% tax-free and 75% taxed as income at your marginal rate.9MoneyHelper. Take Your Pension as Multiple Lump Sums Withdraw £10,000 and you get £2,500 free of tax, with £7,500 taxable.
The approach suits people who want a simple, periodic income stream and are content to pay tax on the larger portion of each withdrawal. There is no separate drawdown fund to run and no separate investment decisions to make on the taxable side. Your provider reports each payment through PAYE and deducts tax before the money reaches your bank account.10HM Revenue & Customs. HMRC Pension Schemes Services Newsletter 67
Every UFPLS payment triggers the MPAA, because every payment includes taxable income. That is the main trade-off against phased drawdown.
When UFPLS Is Not Available
HMRC blocks UFPLS payments in two situations:11HM Revenue & Customs. Pensions Tax Manual – Uncrystallised Funds Pension Lump Sum
- You hold enhanced or primary protection with registered lump sum rights above £375,000, secured when the lifetime allowance was introduced in 2006.
- You received a disqualifying pension credit through a divorce settlement where your ex-spouse’s pension was already in payment.
If either applies, phased drawdown is the alternative route to staged tax-free cash.
Choosing Between Drawdown and UFPLS
The right method depends on whether you are still building pension savings and how much control you want over the tax treatment of each withdrawal.
- Still contributing to a pension: phased drawdown is almost always the better choice. You can take your 25% slices without triggering the MPAA, as long as you leave the taxable portion invested in the drawdown fund. Every UFPLS payment, by contrast, triggers the MPAA.
- Finished contributing and want simplicity: UFPLS is more straightforward. You make a withdrawal, the provider handles the tax split, and you do not have to think about a separate fund or investment allocation.
- Want to control your tax bill year by year: drawdown gives you more room. You could crystallise a slice in a low-income year, take the tax-free cash, then hold off on drawing the taxable portion. UFPLS makes you take both together.
The Small Pot Route
If any of your pension pots are worth £10,000 or less, you can cash them in entirely under the small pot rules. As with UFPLS, 25% is tax-free and the rest is taxable.12GOV.UK. Tax When You Get a Pension: What’s Tax-Free You can take up to three small pot lump sums from personal pensions and an unlimited number from workplace pensions.
The real benefit is that small pot payments do not trigger the MPAA. If you have several old workplace pots scattered around, clearing them this way will not cut your future contribution limit. Worth checking before you set up a broader drawdown or UFPLS strategy on your main pension.
Why the MPAA Matters So Much
The standard annual allowance for pension contributions is £60,000. Once you trigger the MPAA, the maximum you can contribute to a defined contribution pension and still receive tax relief drops to £10,000 a year.13MoneyHelper. Money Purchase Annual Allowance (MPAA) That reduction is permanent as long as you keep making money purchase contributions.
Trigger events include taking any taxable income from a flexi-access drawdown fund and taking any UFPLS payment.7HM Revenue & Customs. Pensions Tax Manual – Money Purchase Annual Allowance: Trigger Events Designating funds into drawdown and taking only the tax-free 25% does not trigger it. Nor do small pot lump sums. This is where people most often trip up: a single UFPLS payment of a few thousand pounds slashes the annual contribution limit from £60,000 to £10,000. If you are still working with years of pension saving ahead, understand this before taking any taxable flexible payment.
Emergency Tax on Your First Withdrawal
Your first taxable pension withdrawal will almost certainly be overtaxed. If your provider does not hold a current tax code from HMRC, they apply the emergency code 1257L on a Month 1 basis. That gives you just one-twelfth of the annual personal allowance (roughly £1,048) against the payment, then taxes the rest at basic, higher, and additional rates as if you drew the same amount every month of the year. On a one-off £20,000 withdrawal, the emergency calculation can produce a bill several times larger than what you actually owe.
It sorts itself out, but you may need to prompt it. If you plan to take further withdrawals in the same tax year, HMRC will usually send your provider an updated code that corrects the position on your next payment. If not, you can reclaim the overpayment by filing form P55, which applies where you have taken a partial withdrawal and do not expect to take another before the end of the tax year.14GOV.UK. Claim Back Tax on a Flexibly Accessed Pension Overpayment (P55) If you emptied a pot completely, use P50Z (no other taxable income) or P53Z (other income sources exist). You can submit these online through your Government Gateway account or by post.
If you do nothing, HMRC will review your tax position after the end of the tax year and issue a refund automatically, but that could take months. Filing the P55 as soon as you receive your first payment statement is faster and usually resolved within a few weeks.
How to Start Taking Phased Payments
Get a current valuation before contacting your provider. Most schemes show this on an online member portal or your latest annual statement. Markets move, and the 25% is calculated on the value at the point of crystallisation, not when you first enquired.
When you contact your provider, tell them whether you want phased drawdown or UFPLS, and specify the amount for the first tranche. Standard identity verification applies: valid photo ID such as a passport or driving licence, proof of address, and bank details for the payment. If you have a P45 from a recent employer or another pension provider, supplying it helps your provider apply the right tax code rather than the emergency code.
Most providers accept applications through secure online portals. Verification and processing usually take five to ten business days. Your provider will send a confirmation showing the tax-free portion paid, any tax withheld, and your remaining lump sum allowance. Providers also run Confirmation of Payee checks on your bank details before sending funds, matching the account name against the sort code and account number to prevent misdirected payments.15Payment Systems Regulator. Confirmation of Payee
Check withdrawal fees before you commit to a schedule. Some providers charge nothing, others levy £25 to £150 per event. If you plan to take small, frequent withdrawals, those fees erode the pot quickly, so it may be worth batching into fewer, larger tranches or moving to a provider with lower charges. Keep every confirmation statement: you will need the running total of tax-free cash taken if you have pensions with multiple providers, or if HMRC queries your lump sum allowance usage later.