Tax-free Lump Sum
What is the tax-free lump sum?
When you access your pension, you can usually take 25% of it as tax-free cash. This is sometimes called the “pension commencement lump sum” or just “the 25%.”
If your pension pot is £100,000, you could take £25,000 tax-free. The remaining £75,000 would be taxed as income when you withdraw it.
Is there a limit?
Yes. The maximum tax-free lump sum is £268,275 (25% of the old lifetime allowance of £1,073,100). If your pension is worth more than about £1.07 million, you can’t take 25% of the whole thing tax-free.
Do you have to take it all at once?
No. You can take the 25% in stages through drawdown. Each time you move money into drawdown, 25% of that amount is tax-free. This can help you manage your income and stay in a lower tax band.
What can you use it for?
Anything you like. Pay off a mortgage, go on holiday, help your children—it’s your money. Some people take it all, some take none, some take a bit at a time.
Key points
- 25% of your pension is tax-free – the rest is taxed as income
- Maximum £268,275 – can’t take more than this tax-free
- Can take it in stages – don’t have to take it all at once
- Spend it however you want