# Pension tax-free lump sum rules

> Pensions & retirement · Last updated 4 July 2026

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## Quick answer

You can usually take 25% of a defined contribution pension pot tax-free, either in one go or in slices — the rest is taxed as income when withdrawn.

## Who should skip this

Skip this page if you need a personal recommendation or a live quote. This is general UK information — confirm today's figures with the official source linked below.

Tax-free cash is one of the main attractions of UK pensions, but rules differ for defined benefit schemes and those with protection. This guide explains standard rules and reporting.

## Key facts

- Most defined contribution pensions allow 25% tax-free cash on crystallisation
- Defined benefit schemes use a commutation factor to exchange annual pension for lump sum — not always 25% of a pot value
- Protected tax-free cash above 25% exists for some pre-2006 arrangements — transferring may lose protection
- Tax-free cash does not count toward income tax bands, but large taxable withdrawals in the same year might

## Taking lump sums

You can take all tax-free cash upfront or leave funds uncrystallised and take UFPLS payments mixing tax-free and taxable elements. Each approach uses your lump sum allowance differently, so plan before crystallising.

Each crystallisation uses up part of your lump sum allowance under the lump sum allowance rules introduced after the lifetime allowance abolition. Consolidating pots does not create extra tax-free cash beyond your personal allowance.

## DB and public sector schemes

Classic final salary pensions calculate lump sums differently — often by giving up £1 of annual pension for £12 lump sum, depending on scheme factors. The trade-off between income and cash is permanent once you commute.

Check scheme booklets or ask administrators before commuting pension income for cash. Commutation factors vary between schemes and change with interest rates.

## Inheritance considerations

Unused pension pots on death before 75 can often pass tax-free to beneficiaries; after 75 beneficiaries usually pay income tax on withdrawals. Nominate beneficiaries through an expression of wishes form kept up to date.

From April 2027, some unused pensions may fall into estates for inheritance tax — rules are changing. Review nominations and estate planning before the new rules take effect.

## Frequently asked questions

### Is the 25% limit per pension or person?

It applies per person across all pensions through the lump sum allowance — consolidating pots does not create extra tax-free cash.

### Can I take tax-free cash without retiring?

From minimum pension age you can access DC pensions while still working — tax-free cash is available but MPAA may apply if you take taxable income.

### Do I pay tax on reinvesting tax-free cash?

Reinvesting in ISAs or buy-to-let uses after-tax money — no further tax on ISA growth, but property and dividends have their own rules.

## Primary source

https://www.gov.uk/tax-on-your-private-pension

## Related

- [April 2027 pension IHT](https://moneyguide.org.uk/pensions/april-2027-pension-iht/)
- [Pension death benefits](https://moneyguide.org.uk/pensions/pension-death-benefits/)

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Independent UK money guidance from [Money Guide](https://moneyguide.org.uk). Information only — not regulated financial advice.