The quarter that comes out tax-free is the best-known rule in pensions and the one people get wrong at the edges. It is a share of each pot, capped across all of them; it can be taken in one piece or in slices; and how you take it decides whether HMRC cuts what you can pay in afterwards.
How much is tax-free
GOV.UK says you can usually take up to 25% of the amount built up in any pension as a tax-free lump sum, and that the most you can take is £268,275 (GOV.UK, Tax when you get a pension, checked 1 November 2026). The 25% is worked out on each pension when you access it, and the £268,275 is a lifetime cap across all of them.
The cap has a name. GOV.UK calls it the lump sum allowance, and says a higher figure of £1,073,100, the lump sum and death benefit allowance, applies to lump sums paid because of serious illness or to your beneficiaries after death (GOV.UK, Tax on your private pension contributions, checked 1 November 2026). For a pot under £1,073,100 the cap does not bite; 25% of it is under £268,275.
Where the cap came from
HMRC’s guidance says the lifetime allowance was abolished from 6 April 2024, and that from that date there is instead a limit on total tax-free lump sums. It lists what counts: a pension commencement lump sum, the 25% element of an uncrystallised funds pension lump sum, and a stand-alone lump sum (HMRC, Find out the rules about Individual Lump Sum Allowances, checked 1 November 2026).
That list matters for anyone who took benefits before April 2024. Lump sums taken then reduce the allowance you have left now, and the provider works out how much.
Two ways to take it
The first route is a single lump sum up front. GOV.UK says you can usually take up to 25% tax-free and then have six months to start taking the remaining 75%, which you usually pay tax on (GOV.UK, Personal pensions, checked 1 November 2026). HMRC calls that a pension commencement lump sum.
The second route takes the tax-free share slice by slice. HMRC’s manual says an uncrystallised funds pension lump sum, a UFPLS, money taken from a pot you have not started drawing, is taxed with 25% not liable to tax and 75% taxed as pension income (HMRC Pensions Tax Manual, PTM063300, checked 1 November 2026). Each withdrawal is a quarter free and three-quarters taxable, and the rest of the pot stays untouched. The same manual notes the minimum age is 55, rising to 57 from 6 April 2028.
What happens to the rest
After the lump sum, GOV.UK says the options for the other 75% include taking all or some of it as cash, or buying an annuity, a product that gives a guaranteed income for life. The third is flexi-access drawdown, investing it for a regular adjustable income (GOV.UK, Personal pensions, checked 1 November 2026).
Not every provider offers every option. GOV.UK says to ask your pension provider which options they offer, that you can transfer to a different provider if you do not want theirs, and that you do not have to buy your annuity from your pension provider.
Whichever you choose, the money is income when it arrives. Our tax on pensions hub has the bands, and a large taxable withdrawal in one year is taxed on top of the State Pension and everything else.
Annuity first, cash later?
Buying an annuity with the whole pot and taking the tax-free cash afterwards is not described on GOV.UK, which frames the lump sum as taken at the start (GOV.UK, Personal pensions, checked 1 November 2026). Whether a scheme will pay the tax-free element later, or alongside an annuity purchase, is a question for the provider.
The reverse, taking the cash and never buying an annuity, is plainly allowed: GOV.UK lists cash and drawdown beside the annuity as options for the rest.
The lump sum and the money purchase annual allowance
Taking the tax-free lump sum alone leaves your contribution allowance intact. HMRC’s manual says the money purchase annual allowance will not apply on payment of a pension commencement lump sum, a trivial commutation lump sum or a small lump sum (HMRC Pensions Tax Manual, PTM056530, checked 1 November 2026).
Taking taxable money flexibly is different. The Finance Act says a person first flexibly accesses pension rights immediately before the first uncrystallised funds pension lump sum is paid, or the first payment from a flexi-access drawdown fund (Finance Act 2004, section 227G, checked 1 November 2026). From then the allowance for defined contribution contributions is £10,000, and our money purchase annual allowance page sets it out.
Before 55, and over the limit
Payments a scheme is not allowed to make are taxed hard. GOV.UK says you pay up to 55% tax on an unauthorised payment, which usually includes any payment before you are 55, apart from exceptions, and a trivial commutation lump sum of over £30,000 (GOV.UK, Tax when you get a pension, checked 1 November 2026).
Offers to release pension money early, or to take more than the rules allow, are how people meet that rate. GOV.UK’s exceptions are ill health and a protected earlier pension age, and anyone else promising cash before 55 is describing an unauthorised payment.
Benefits, and the money once it is out
For Pension Credit, a lump sum you keep is savings. GOV.UK says £10,000 or less does not affect the benefit, that every £500 over £10,000 counts as £1 a week of income, and that you must report taking a lump sum out of your pension pot (GOV.UK, Pension Credit, checked 1 November 2026).
Housing Benefit and Council Tax Reduction at pension age use the same £10,000 disregard and a £16,000 limit, covered on the Housing Benefit savings page. Money given away to get under a limit is on the deprivation of assets page.
Before you take it
Three checks, none of them advice. A lump sum kept in the bank is savings for Pension Credit, Housing Benefit and Council Tax Reduction, and must be reported. Taking taxable money alongside it, as a UFPLS or drawdown income, cuts what you can pay in to £10,000. And the taxable 75% is taxed in the year it is drawn.
The sections above carry the sources for each. Who shouldn’t take the cash now is a question for Pension Wise or a regulated adviser.
Free guidance, then advice
GOV.UK says Pension Wise, part of MoneyHelper, offers a free appointment to anyone over 50 with a defined contribution pension, and that MoneyHelper does not provide financial advice (GOV.UK, Personal pensions, checked 1 November 2026). Whether to take the cash, and when, is what a regulated adviser is paid to answer.
GOV.UK adds that you can take up to £500 out of a pension to pay for retirement advice, once a year up to three times, without a tax charge (GOV.UK, Plan your retirement income, checked 1 November 2026). If the first payment you take is over-taxed, our emergency tax page covers getting it back.