The 25% tax-free lump sum

How it works

From the normal minimum pension age you can usually take up to 25% of a defined contribution pension free of income tax. The remaining 75% is taxable as income when you draw it, at your marginal rate.

You do not have to take it all at once. You can crystallise part of a pension, take the tax-free element from that part, and leave the rest untouched. Doing it in stages is often more tax-efficient than a single large withdrawal, because it gives you more control over which tax band the taxable element falls into.

The earliest you can normally take it is 55, and that rises to 57 on 6 April 2028. Anyone born after 5 April 1973 will therefore wait until 57, and people born either side of that date can find their plans move by two years.

The amount you can take tax free across all your pensions is capped by the lump sum allowance, which is £268,275.

There is a cap

The tax-free amount is limited by an overall allowance, so 25% is the rate but not necessarily the amount. For most people the cap is not the binding constraint. For anyone with a large total pension it is, so it is worth checking.

Some people hold protected entitlements from earlier regimes that give them a higher figure. If you have any form of transitional protection, do not act on general information, including this page. Get your own position checked.

The mistake that costs the most

Taking the lump sum because you can, without a use for it.

Inside a pension, money grows free of income tax and capital gains tax. Once it is in a bank account it earns taxable interest, and once it is in a general investment account gains and dividends are taxable. If you take £100,000 out and leave it in cash for a decade, you have moved it from a tax-free environment into a taxable one and given up growth, for no purpose.

From April 2027 there is a second dimension: money still inside a pension counts towards your estate for inheritance tax, but so does money sitting in your bank account. Taking the lump sum out does not by itself solve an inheritance tax problem. Spending it or gifting it might, and those are different actions with their own consequences. See inheritance tax on pensions from April 2027.

What taking it triggers

Taking tax-free cash on its own, without drawing any taxable income, does not usually reduce how much you can still contribute. But once you take taxable income flexibly, the money purchase annual allowance applies and your future contribution limit drops sharply.

That matters a great deal if you are still working, or might return to work. Triggering it accidentally, to fund something you could have funded another way, is an expensive mistake and it cannot be undone.

Good reasons to take it

However, ISA investors do not pay any personal tax on income or gains, but ISAs may pay unrecoverable tax on income from stocks and shares received by the ISA managers.

• Clearing a mortgage or expensive debt, where the interest saved is real and certain.
• A specific, funded purpose: adapting a home, a planned one-off cost.
• Bridging a gap between stopping work and the state pension starting, where taking tax-free cash keeps your taxable income low in those years.
• Deliberately filling ISA allowances over several years to build a pot that is both tax-free and accessible.

Reasons that usually do not hold up

• Worry that the rules will change, which drives a lot of poorly timed withdrawals.
• Taking it at 55 or 57 simply because you have become eligible.
• Moving it into cash for safety, which usually means a real loss to inflation.

If you have a final salary pension

Defined benefit schemes work differently. You are usually giving up guaranteed annual income in exchange for cash, at a rate set by the scheme called the commutation factor. Some scheme factors are poor value and some are reasonable, and the calculation is specific to your scheme. It is not the same decision at all, and it deserves its own analysis.

This page is general information about the rules and does not constitute advice.

Last reviewed: 17 September 2026. Next review: Annually.