Can I take a lump sum from my pension?

What is the pension tax-free lump sum?

When you take money from your pensions, you generally have to pay tax on this income. However, you can take up to 25% of your defined contribution pension as a tax-free lump sum. This is known as the pension commencement lump sum.

You don't have to take all your tax-free cash at once. Instead of taking a single lump sum, you can choose to take several lump sums that add up to 25% of your pension's value.

The maximum amount of tax-free cash you can take from all your pensions combined is usually £268,275.

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Can I withdraw my tax-free lump sum before age 55?

In normal circumstances, you can't withdraw any of your pension before the age of 55 (rising to 57 in 2028) without paying a huge tax charge of up to 55%.

Ignore any companies offering early pension access with the promise that they can help you dodge these penalties. 

This is a popular tactic among scammers that can leave you with little or no money in your pot.

If you're in poor health, you may be able to access your money earlier than 55 without facing punitive tax charges. Speak to your pension scheme to check if this applies to you. 

What can I do after taking my tax-free lump sum?

You can take up to 25% of the amount in your pension as a tax-free lump sum. You then have several options for accessing the rest of the money:

• keep it invested and make withdrawals as you need, using pension drawdown 
• buy an annuity
• take the remaining amount as cash

Regardless of how you choose to take the remaining 75% of your pension, this income will be taxable.

Can I continue paying into my pension after taking a tax-free lump sum?

Yes, you can still save into your pension even if you've started taking money from it.

The maximum you can pay into your pension each year while benefitting from tax relief is either £60,000 or your salary - whichever is lower. This is known as the annual allowance.

If you've only taken your tax-free cash, the annual allowance will still apply. But if you've taken any taxable income from your pension, this allowance drops to £10,000 (known as the Money Purchase Annual Allowance, or MPAA).

What is an uncrystallised pension lump sum or UFPLS?

If you haven't decided how you'll take an income from your pension in the long term, you have the option to leave money in your pension and take out lump sums when you need to.

The technical term for this is 'uncrystallised funds pension lump sums', or UFPLS.

With UFPLS, usually 25% of each withdrawal is tax-free, with the rest charged at your normal income tax rate. For example, if you took £20,000 as an UFPLS, £5,000 of this would be tax-free and the remaining £15,000 would be taxable. 

You can only opt for UFPLS if you've not already taken any tax-free cash or income from your pension.

What are the pros and cons of UFPLS?

Not all pension companies will offer UFPLS, while some may limit you to one or two lump-sum withdrawals a year, or apply a charge if you take out all your money within a set period of time.

If you go ahead and take sums from your pension in this way, the main things to consider are the tax implications and the possibility of running out of money.

It'll be up to you to make sure your withdrawals are sustainable and that your savings last as long as they need to. 

Bear in mind you don't need to take your whole pension using UFPLS - you might take some this way and then arrange drawdown or an annuity with the remaining pot. 

If you opt for UFPLS, the amount you can pay into a pension and still get tax relief on falls to £10,000 a year (from £60,000).

How much tax will I pay on a pension lump sum?

Use our pension lump sum tax calculator to work out how much you could have to pay when you take money from your pot. 

This calculator applies income tax in England, Wales and Northern Ireland. Income tax in Scotland is different - we will be updating the calculator soon.

Emergency tax on pension lump sums

Due to an unfortunate quirk in the tax system, the first lump sum you take from your pension often won't be taxed correctly, meaning that you'll pay more tax than you need to.

HMRC applies what's known as a 'Month 1' tax code to you first withdrawal, which assumes the amount you've withdrawn is 1/12th of your annual income.

So, if you withdraw £20,000 from your pension as an uncrystallised fund pension lump sum, the withdrawal is assumed to be part of a £240,000 annual income.

This means you could be hit with a tax bill running into thousands of pounds.

HMRC will eventually repay this tax to you, ordinarily at the end of the tax year.

But you can get your money back within 30 days by submitting one of three forms to HMRC:

• P55 is for those who take out some but not all of their pension as a lump sum
• P50Z is for those who take out all of their pension and are no longer working
• P53Z is for those who take out all of their pension and are still working

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Taking a lump sum from a final salary pension

With a defined benefit or final salary pension scheme you get a guaranteed income for the rest of your life, which is based on your final salary or your career average salary when you come to retire.

The size of your tax-free lump sum, and the impact taking it will have on the rest of your retirement income, will be determined by what's known as a 'commutation factor'.

This is the rate at which you give up the annual payments you'll get in retirement in exchange for getting some cash up front. The higher the commutation factor, the better the deal is for you.

Public sector pension schemes, such as those operated by the NHS and the civil service, and in education, tend to have a commutation factor of 12.

Private sector schemes are more likely to have a higher commutation factor of 14 or 15.

More pension tax-free lump sum FAQs