Key Pension Limits 2025/26
Lump Sum Allowance (LSA)
£268,275
Tax-Free Cash Per Crystallisation
25%
Normal Min Pension Age
55 (57 from 2028)
Annual Allowance
£60,000
MPAA (once triggered)
£10,000
Quick Summary
What it is: Pension tax-free cash (formally the Pension Commencement Lump Sum, or PCLS) is up to 25% of your pension pot that you can take completely free of income tax when you first access it
Lifetime cap: The Lump Sum Allowance (LSA) limits your total pension tax-free cash to £268,275 across all your pensions in your lifetime. Any tax-free cash taken above your available Lump Sum Allowance is taxed at your marginal income tax rate
Three ways to take it: All at once, in stages via partial crystallisation (often the most tax-efficient), or as an Uncrystallised Funds Pension Lump Sum (UFPLS). Note: UFPLS permanently triggers the MPAA even on the first payment
MPAA warning: Taking only your PCLS does NOT trigger the MPAA. Taking a UFPLS or drawing taxable income from drawdown does. See our MPAA guide for full details
Crystallised vs uncrystallised: Uncrystallised funds still have their 25% PCLS available. Once crystallised (moved to drawdown), the PCLS has been taken and further withdrawals from that pot are fully taxable
Protected tax-free cash: Some people may be entitled to more than 25% or more than £268,275 because of Lifetime Allowance protections registered before 2024. Check with your provider before acting. Taking any pension benefits without checking could permanently reduce or eliminate your protection
IHT change from April 2027: From 6 April 2027, undrawn pension wealth will be included in your estate for inheritance tax purposes. Subject to final legislation
When you start taking money from your pension, pension tax-free cash is one of the most valuable benefits available to you. Up to 25% of the amount you crystallise can be taken completely free of income tax, subject to your remaining Lump Sum Allowance. Known formally as the Pension Commencement Lump Sum (PCLS), most people understand the principle, but frequently misunderstand how it works in practice.
However, there is more to pension tax-free cash than simply taking a quarter of your pot.
The total you can take is capped at £268,275 across all your pensions in your lifetime. You can take it all at once or spread it across multiple years, and the method you choose directly affects both the tax you pay and whether you permanently trigger the Money Purchase Annual Allowance (MPAA). In addition, there is a significant change on the horizon: from April 2027, undrawn pension wealth is expected to become subject to inheritance tax for the first time, under proposed rules that are subject to final legislation.
The rules changed significantly in April 2024 with the removal of the Lifetime Allowance, making it more important than ever to understand how the new system works. Understanding your options now, while the current rules still apply, is genuinely important for anyone in their 50s or early 60s approaching retirement. This guide explains exactly how pension tax-free cash works, how the £268,275 cap applies, the three ways to take it, the partial crystallisation strategy, and how it all interacts with the MPAA.
What is pension tax-free cash?
Pension tax-free cash, formally called the Pension Commencement Lump Sum (PCLS), is the portion of your pension that you can take free of income tax when you first access, or crystallise, a pension pot. Under the current rules, you can take up to 25% of the amount you crystallise tax-free, subject to a lifetime cap of £268,275 across all your pensions.
You typically designate the remaining 75% of your crystallised pot to a flexi-access drawdown arrangement, where it stays invested. You can then withdraw it as taxable income over time, or use it to buy a lifetime annuity.
This guide focuses on defined contribution (money purchase) pensions. The rules for defined benefit (final salary) schemes are different and are not covered here.
Age requirement for pension tax-free cash
You cannot take tax-free cash from your pension before the normal minimum pension age, which is currently 55. This will increase to 57 on 6 April 2028, unless you have a scheme-specific protected pension age. If you are approaching 55 and planning to access pension money in the next few years, the timing of this change is worth factoring into your plans.
Crystallised and uncrystallised pension funds: what is the difference?
Before making any decisions about taking pension tax-free cash, therefore, it is essential to understand the difference between crystallised and uncrystallised funds. These terms appear constantly in pension planning but are rarely explained clearly.
Specifically, uncrystallised funds are the money inside a pension pot that you have not yet accessed. These funds sit fully within the pension wrapper, growing free of income tax and capital gains tax. The 25% PCLS is still available in full when you eventually access them.
By contrast, crystallised funds are the money you have already moved into flexi-access drawdown or used to buy an annuity. The PCLS has already been taken on crystallised funds. Any further withdrawals from a crystallised drawdown pot are fully taxable as income at your marginal rate.
Why this distinction matters for pension tax-free cash planning
If you take money from an uncrystallised pot, you trigger a new crystallisation event: 25% is tax-free, 75% goes to drawdown. If you take money from an already-crystallised drawdown pot, it is 100% taxable income. This is why many people choose to crystallise gradually over time rather than all at once, giving them far more control over the taxable income they generate each year.
Article 6 in this series will cover flexi-access drawdown in detail, including how to manage withdrawals from a crystallised pot and what to consider when planning sustainable retirement income.
How much pension tax-free cash can you take?
The total pension tax-free cash you can take across all your pensions in your lifetime is capped at £268,275. This is the Lump Sum Allowance (LSA), introduced on 6 April 2024 when the old Lifetime Allowance was abolished.
The Lump Sum Allowance replaced the Lifetime Allowance for tax-free cash purposes from 6 April 2024. While the Lifetime Allowance charge has been abolished, limits still apply to the amount of tax-free cash that can be taken. HMRC set the LSA at exactly 25% of the old Lifetime Allowance of £1,073,100.
In practice, if the combined value of all your pension pots is £1,073,100 or less, you can take 25% of each pot as tax-free cash without hitting the cap. If your total pension wealth exceeds that figure, any tax-free cash taken above your available Lump Sum Allowance (£268,275 for most people) is taxed at your marginal income tax rate.
| Total pension pot value | 25% of pot | Tax-free cash received | Taxable portion |
|---|---|---|---|
| £400,000 | £100,000 | £100,000 | None |
| £800,000 | £200,000 | £200,000 | None |
| £1,073,100 | £268,275 | £268,275 | None (exactly at cap) |
| £1,200,000 | £300,000 | £268,275 | £31,725 taxable |
| £1,500,000 | £375,000 | £268,275 (capped) | £106,725 taxable |
What happens if you exceed your Lump Sum Allowance?
If the total pension tax-free cash you have taken across all your pensions over your lifetime exceeds your available Lump Sum Allowance, the excess is taxed at your marginal income tax rate. Consequently, anyone with a very large pension fund or multiple pots should carefully track cumulative crystallisations. However, for most people with total pension wealth under £1,073,100, the cap will never be reached.
Protected pension tax-free cash: check before you act
Some people are entitled to more than 25% tax-free cash, or more than £268,275, because of transitional protections registered before the Lifetime Allowance was abolished in 2024. These include Enhanced Protection, Fixed Protection, and scheme-specific protected cash rights.
Warning: acting without checking could permanently eliminate your protection
If you registered any form of Lifetime Allowance protection before 2024, check with your pension provider or a qualified financial adviser before taking any pension tax-free cash. Taking pension benefits without verifying your protection status first could permanently reduce or eliminate your entitlement to enhanced tax-free cash. This cannot be reversed.
Three ways to take your pension tax-free cash
There is no single right way to take pension tax-free cash. The best approach depends on your income, tax position, and the level of flexibility you need.
Option 1: Take it all at once (full crystallisation)
You crystallise your entire pension pot in one event, take 25% as tax-free PCLS, and designate the remaining 75% to a drawdown arrangement. This is the simplest approach and, as a result, gives you the maximum immediate lump sum.
However, it counts the full PCLS against your LSA at once, and any taxable drawdown income drawn on top of other income in the same year could push you into a higher rate band sooner than expected.
Option 2: Take it in stages (partial crystallisation)
You crystallise a portion of your pension each year rather than crystallising it all at once. Each partial crystallisation event delivers 25% of the crystallised amount as tax-free cash, and you move the remainder to drawdown. Meanwhile, your remaining uncrystallised funds continue to grow within the pension wrapper.
This is often the most tax-efficient approach, particularly if you are also drawing other income such as a salary, rental income, or state pension. By timing crystallisation events across different tax years, you can align withdrawals with your tax bands each year, thereby significantly reducing the total tax paid over retirement. Spreading crystallisations across years when your total income is lower keeps more of your drawdown income within the basic rate band.
Option 3: Uncrystallised Funds Pension Lump Sum (UFPLS)
A UFPLS is a lump sum taken directly from an uncrystallised pension pot without first setting up a drawdown arrangement. Each UFPLS payment is 25% tax-free and 75% immediately taxable. You can take multiple UFPLS payments over time as long as you have uncrystallised funds remaining. Although UFPLS is often chosen for its simplicity, it offers less control over tax than partial crystallisation because the taxable portion is forced into the same tax year as the withdrawal, with no ability to defer it.
Critical warning: UFPLS triggers the MPAA immediately and permanently
Taking a UFPLS triggers the Money Purchase Annual Allowance (MPAA), permanently reducing your future pension contribution limit from £60,000 to just £10,000 per year. This applies even on the very first UFPLS payment, no matter how small. If you are still working and contributing to a pension, this is a serious and irreversible consequence. Taking PCLS via partial crystallisation without drawing taxable income from the drawdown pot does not trigger the MPAA. See our dedicated MPAA guide for full details.
Worked example: taking pension tax-free cash in stages using partial crystallisation
Margaret is 60 and works as a senior manager, earning £65,000 per year. She has a SIPP worth £400,000. She does not need the full 25% tax-free cash right now and wants to manage her income tax position carefully across the years leading up to full retirement.
Rather than crystallising the full £400,000 in one event, therefore, she crystallises in stages over three years.
| Year | Amount crystallised | PCLS (tax-free) | LSA used (cumulative) | To drawdown |
|---|---|---|---|---|
| 2025/26 | £100,000 | £25,000 | £25,000 | £75,000 |
| 2026/27 (part-time, £40k salary) | £100,000 | £25,000 | £50,000 | £75,000 |
| 2027/28 (fully retired) | £200,000 | £50,000 | £100,000 | £150,000 |
| Total | £400,000 | £100,000 | £100,000 of £268,275 LSA used | £300,000 |
In 2025/26, Margaret takes £25,000 tax-free and draws £10,000 in taxable drawdown income on top of her £65,000 salary, keeping her total income at £75,000. In 2026/27, she reduces to part-time at £40,000 and draws more drawdown income while staying mostly within the basic rate band. By 2027/28, fully retired, she crystallises the remainder, takes a final £50,000 PCLS, and manages drawdown withdrawals carefully.
As a result of spreading crystallisation over three years, Margaret takes the same total pension tax-free cash she would have received all at once, while managing the taxable drawdown income far more efficiently across years with very different income levels.
Key takeaway: partial crystallisation does not change the total you receive
Partial crystallisation does not increase the total pension tax-free cash you receive. It is always 25% of whatever you crystallise, subject to the £268,275 LSA. What changes is when the taxable drawdown income hits your tax return, and that timing can make a very significant difference to the overall tax you pay across retirement. Margaret’s total LSA used is £100,000, leaving £168,275 of her lifetime allowance intact for any future pensions.
How pension tax-free cash interacts with the MPAA
Taking pension tax-free cash on its own does not trigger the MPAA, provided you do not draw any taxable income from the drawdown pot that receives the remaining 75%. To be precise: the MPAA is triggered when you first take taxable income from a pension, not when you take only tax-free cash. This distinction matters enormously for anyone who is still working and contributing to a pension.
| Action | Triggers MPAA? |
|---|---|
| Taking 25% PCLS only, rest designated to drawdown but no taxable income drawn | No |
| Drawing taxable income from a flexi-access drawdown pot | Yes |
| Taking a UFPLS (triggers MPAA on the very first payment, regardless of amount) | Yes |
| Drawing income from a defined benefit pension | No |
| Cashing in a small pension pot under £10,000 under the small pots rule | No |
The April 2027 inheritance tax change: what you need to know now
Under the current rules, undrawn pension wealth sits outside your estate for inheritance tax purposes.
Pension pots that you have not yet drawn from pass to your beneficiaries free of IHT in most cases. This has made pensions a popular vehicle for passing wealth across generations and has influenced how many people approach drawdown decisions.
However, that is changing significantly. In the 2024 Autumn Budget, the government announced that from 6 April 2027, both uncrystallised pension funds and unused drawdown funds are expected to be included in your estate for IHT purposes under the proposed rules.
The standard 40% IHT rate would apply to the pension portion of the estate above the nil-rate band, unless exemptions apply, such as the spousal or civil partner exemption. HMRC estimates the change will affect around 10,500 estates per year once it comes into force.
This is subject to final legislation: professional advice is essential
The April 2027 IHT change was announced in the 2024 Autumn Budget but was still subject to parliamentary scrutiny at the time of writing. HMRC published draft legislation in July 2025. The rules as proposed would fundamentally change the way pension wealth interacts with estate planning. The interaction between IHT on pensions, the nil-rate band, and existing death benefit nominations is complex. Anyone with significant pension wealth should take specialist advice before making any decisions based on the proposed changes, and should monitor the legislation as it progresses.
What does the April 2027 pension inheritance tax change mean in practice?
Consequently, the practical implication is that drawing down your pension more actively during your lifetime, and using the proceeds for lifetime gifting, ISA contributions, or other planning strategies, may become more attractive from April 2027 onwards. This is a complex area with no single right answer: the best approach depends on your individual estate, tax position, and beneficiary circumstances.
Pension tax-free cash: frequently asked questions
Q: Can I take my pension tax-free cash and continue contributing to my pension?
Yes, as long as you take only the PCLS and do not draw taxable income from the drawdown pot. Your £60,000 annual allowance remains fully intact in this scenario. The MPAA is only triggered by drawing taxable income from drawdown or taking a UFPLS. See our pension annual allowance guide for full details on contribution limits.
Q:Does pension tax-free cash count towards my adjusted net income?
No. PCLS is not taxable income and does not count towards your adjusted net income for income tax purposes, child benefit high income charge calculations, or most means-tested benefit assessments. The 75% taxable element of a UFPLS, or any taxable drawdown income, does count as income and can affect these calculations.
Q:What happens to my uncrystallised pension if I die before taking it?
Currently, uncrystallised pension funds pass to your nominated beneficiaries largely outside your estate for IHT. From April 2027, unused pension wealth is expected to be included in your estate under the proposed IHT reforms, subject to final legislation. The rules on how lump sum death benefits are taxed also depend on your age at death. This is an area where professional advice is strongly recommended, particularly if your estate is above the nil-rate band threshold.
Q: I have pension protections from the old Lifetime Allowance. Does this change anything?
Yes, potentially significantly. If you registered Enhanced Protection, Fixed Protection, or any other form of Lifetime Allowance protection before 2024, your entitlement to tax-free cash may be higher than the standard 25% or higher than £268,275. However, certain actions can invalidate your protection. Always speak to a qualified pension specialist before taking any action on a pension where you hold a protection certificate.
Also in this series
Also in this series
Important: This article is for informational purposes only and does not constitute financial advice. Pension rules are complex and personal circumstances vary. The information in this article reflects the rules as of the 2025/26 tax year. The proposed changes to inheritance tax on pensions from April 2027 are subject to final legislation and may be amended before implementation. The interaction between pension tax-free cash, the MPAA, Lifetime Allowance protections, and inheritance tax planning is a particularly complex area where professional advice is strongly recommended. Always speak to a qualified independent financial adviser before making decisions about how or when to access your pension.
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