Taking tax-free cash: what to consider first

How it works

From age 55 you can usually take up to 25% of your pension tax-free. The minimum age rises to 57 from 6 April 2028, unless your scheme gives you a protected earlier age.

For most people, the total tax-free cash you can take across all your pensions is capped at £268,275, known as the Lump Sum Allowance. Some people have a higher limit through older protections.

Anything you take above the tax-free part is added to your income for that tax year and taxed at your usual rate.

The main ways to take it

All at once

You take your full tax-free amount in one go. The rest can stay invested in drawdown, or be used to buy an annuity, a guaranteed income for life.

In stages

You take smaller amounts over time. With some arrangements, each withdrawal is part tax-free and part taxable. Spreading it out can help you avoid paying a higher rate of tax in any one year.

Leave it

You don't have to take tax-free cash at all. Money left in a pension usually stays invested.

Questions to ask first

• What's it for? Paying off a mortgage or helping family can make sense. Taking it just to put in a bank account can mean losing out on investment growth and making it easier to spend.
• Will it affect your other income? Once you take taxable money from a pension flexibly, the Money Purchase Annual Allowance usually applies. That limits future pension contributions to £10,000 a year with tax relief.
• How does it fit with inheritance tax? From April 2027, most unused pensions will count towards your estate for IHT. That may change how some people think about what to take and when. Read our guide to the change.
• Does your scheme have valuable guarantees? Some older pensions offer guaranteed annuity rates or more than 25% tax-free cash. Moving or cashing them in could mean losing these.

Free guidance

If you're 50 or over and have a defined contribution pension, you can get free, impartial guidance from Pension Wise. This guide is general information, not advice. For a recommendation based on your circumstances, speak to an FCA-regulated adviser.