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Can I take more than 25% tax-free from my pension?

Could you be entitled to more than 25% tax-free cash?

Written by Retirement Line Updated: 22nd January 2024

When you reach age 55 (age 57 from 6 April 2028) you can access money in your ‘defined contribution' personal or workplace pensions. You can take as much as you like as a lump sum, with 25% free from income tax. But what many people approaching retirement do not realise is that they may be entitled to more than the usual 25% tax-free lump sum.

Whether you can take more than 25% will depend on the type of pension scheme you have saved into. We’ll explain more below, but first let’s look at how the 25% rule normally applies to money you take from your pension savings.

Note: This information applies to 'defined contribution' pensions only – the situation for ‘defined benefits’ schemes is different. Whether you can take money without paying tax will depend on the rules of your defined benefit scheme. Please contact your scheme for clarification.

What are the 25% tax-free lump sum pension rules?

For many, the major perk of reaching 55 is being entitled to access the money in your pension fund if you want or need to. Better still, the first 25% of your pension pot can typically be accessed without paying tax on the income. 

This tax-free cash is also called your pension commencement lump sum (PCLS). It can be taken as a lump sum or in smaller amounts (depending on which retirement income product you go on to select).

You don’t have to make use of the 25% tax-free facility. For example, you could choose to leave all of your pension savings invested, or use all of them to buy a retirement income product such as an annuity. But you may decide that the opportunity to access your 25% limit tax-free is in your best interest.

What is the pension Lifetime Allowance?

There is a limit on how much you can take before you are taxed on the whole amount. The rules limit you to a maximum of 25% of your available ‘Lifetime Allowance’. For most people, the standard Lifetime Allowance of £1,073,100 applies. Some people may have put protections in place so that their Lifetime Allowance is higher than this.  

This means that everything you take from your pension over £1,073,100 is subject to income tax at your marginal rate of tax, with no tax-free element. This applies whether you take the money as a lump sum or as income.

Please note that there are other rules relating to the Lifetime Allowance, for example in relation to changes that happen at age 75 and what happens when a pension holder dies. Please take professional financial advice if you wish to understand more.

What is the income tax Personal Allowance?

Another positive aspect of this tax-free cash boost is that it will not use up any of your Personal Allowance. 

Your tax-free Personal Allowance is the amount of income you do not have to pay tax on. The standard Personal Allowance is £12,570 for 2023/24. 

The Allowance may be bigger in some circumstances, for example if you claim Marriage Allowance. It is smaller if your income is over £100,000: in summary, the more you earn over £100,000 the smaller your Personal Allowance until you earn £125,140 - after which it is zero.

How much tax will I pay?

Once you have accessed your full tax-free lump sum you will have to pay income tax at your highest marginal rate on the remainder of your fund if you wish to take more of it in cash.

Any money you take above 25% of your pension pot is added to your other income for the year and taxed at the relevant income tax band. There is a risk that this may push your income into a higher tax bracket than normal, so it’s important to consider this.

Example – taking a single lump sum. Your pension savings add up to £50,000 and you decide to take half of it as a lump sum. In that case, you get £12,500 free from tax and HMRC treats the other £12,500 as taxable income.

Example – taking multiple lump sums. Another option is to take money from your pension as and when you need it (if your pension scheme offers this option – some don’t). The first 25% of the money you take is tax-free. The money left in your pension or moved into a drawdown product remains invested. Remember that taking money from your pension savings will mean you have less invested, and therefore less potential for growth. Also, the value of your savings could go up or down depending on investment performance. 

Example – buying an annuity: You decide to take your full 25% tax-free lump sum and use the rest to buy an annuity. This will provide you with a guaranteed income for life or a fixed term, unaffected by investment performance. This income will be taxable by HMRC at your normal tax rate.

These are illustrative examples and your circumstances will be unique to you. Also, you may be able to ‘mix and match’ these options, for example by leaving some money invested and using some to buy an annuity.

When can I take more than 25% tax-free from my pension?

How much you are entitled to take as a tax-free cash lump sum is dependent on the type of pension scheme you currently have. Some older schemes may include a facility to take more than 25% before tax is payable. 

The most common reason for a larger tax-free lump sum is based on when the policy was written. The last ‘old’ style personal pension policy was issued on 30th June 1988, and any policies effected on or before this date often contain benefits including enhanced tax-free cash entitlements. They were mainly aimed at the self-employed who did not have a workplace pension scheme.

For employees, if you have worked for the same company for a long time then you may also have a larger tax-free cash entitlement. This can be either up to 25% of the fund value or calculated using a formula based on years of service – whichever is greatest.

If you can answer yes to any of the following, you may be entitled to more than the usual 25% PCLS:

  • Was my policy written on or before 30/06/88?

  • Do I have a long length of service with my employer?

  • Is my pension called a:

    - Retirement Annuity Contract (RAC)?
    - Retirement Annuity Policy (RAP)?
    - Deferred Annuity Contract?
    - Section 226?
    - Executive Pension Plan?

If you find that you do have more than a 25% tax-free lump sum entitlement then your retirement income options may be a little more restricted. Retirement Line’s Annuity Specialists will be happy to discuss this further with you to help you understand your options.

For instance, if you wish to access your tax-free cash then you will generally have to withdraw it as one lump sum, as you will not have the option to take it in smaller instalments. Furthermore, you will only have the option of a lifetime annuity and be unable to move your pension fund to flexi-access drawdown or arrange a fixed-term annuity.

Discover your retirement income options today

If you have been saving into certain types of personal or workplace pensions, you may be able to turn your savings into regular income with an annuity. With annuity providers offering some of the best annuity rates for years, you might be able to enjoy more income than you realise.

At Retirement Line, our Annuity Specialists can compare the best annuity rates from leading annuity providers. You could also benefit from the preferential rates we secure due to our position as the UK’s number one annuity broker* and our close relationships with the UK’s best annuity providers. 

Why not get a free no-obligation annuity quote? Or to speak with an Annuity Specialist directly, you can call us on 0800 652 1316, request a call back or email us at 

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