How should you phase your tax-free cash rather than taking it all at once?

01 The annual pattern

Each year, crystallise the amount that produces the cash you need. Crystallising £40,000 gives £10,000 tax free and moves £30,000 into drawdown; crystallising £80,000 gives £20,000 tax free. The rest of the pot stays uncrystallised.

Done annually across the years before the State Pension starts, this produces a stream of tax-free cash with no Income Tax at all, provided you take no taxable drawdown income alongside it.

It is administratively heavier than a single crystallisation — a form or an instruction each year — and the difference in outcome is large enough to justify the effort.

It also changes what happens if you die. Uncrystallised funds and crystallised drawdown funds have different treatment on death, and a household with a large pot and a surviving spouse is choosing between them every time it crystallises. Where the intention is to leave the pension largely intact, crystallising less rather than more is the consistent choice.

Source: Tax on your private pension contributions

02 Combining cash with the personal allowance

The stronger version pairs the cash with taxable income sized to your unused personal allowance. Take £12,570 of taxable drawdown income and enough tax-free cash on top, and the whole withdrawal arrives untaxed while using an allowance that expires annually.

That is close to what an UFPLS does automatically, and it produces the same result by a different route. The difference is that phased crystallisation gives more control over the split between cash and income.

The cost of the taxable element is the money purchase annual allowance, which is triggered by taxable income and not by cash. Someone still contributing should take cash only; someone who has stopped can use both.

On the defaults above, the worked example shows £26,570 a year. Taking £14,000 of cash means crystallising about £56,000, of which £42,000 moves into drawdown.

Source: Income Tax rates and Personal Allowances

03 Why the remainder is worth leaving

Uncrystallised funds carry their own future tax-free entitlement, so growth on them is 25% tax free when eventually crystallised. Crystallised drawdown funds do not — every pound of growth there is taxable when drawn.

Over a nine-year bridge that difference compounds meaningfully, and it costs nothing to capture. The constraint is the lump sum allowance of £268,275, which caps the cumulative tax-free cash across all crystallisations.

The uncrystallised part also has a different death benefit position, which for someone with a spouse and a large pot is worth understanding before choosing how much to crystallise.

The lump sum allowance is the ceiling on all of this, and it is worth knowing where you sit against it before starting. For a pot under about a million pounds the allowance will not bind, and phasing is a pure gain. Above that it becomes the binding constraint, and the growth argument for waiting stops applying to the part of the pot beyond it.

Source: Lifetime allowance and the allowances that replaced it

04 What not to do with the cash

Do not take cash you have no use for. Money inside a pension grows free of tax; the same money in a savings account does not, and it counts as capital for means-tested purposes immediately.

Where cash is taken and not spent, the useful destination is an ISA subscription, which keeps it sheltered. £20,000 a year can be moved that way, which converts an irreversible withdrawal into a still-sheltered asset.

And do not take it because a provider's illustration presents a single large figure. That figure is a quarter of the whole pot, not an offer with a deadline, and nothing is lost by leaving it.

Source: Individual Savings Accounts (ISAs)

05 Setting it up

Decide the annual amount from your actual spending less any other income. Ask the provider what a partial crystallisation costs and how it is instructed — some charge, most do not, and the process varies.

Keep a running record of the lump sum allowance used, because the provider issues a statement each time and nobody else maintains the total. On a large pot that record is what stops an unexpected charge on a later crystallisation.

Review the split each year against the State Pension date. Once the State Pension starts it consumes most of the personal allowance, and the phased plan changes shape accordingly.

One further check belongs in the annual review: whether the provider's charges make repeated crystallisation expensive. A flat fee per crystallisation is common and usually trivial; a percentage charge on each designation is not, and it can outweigh the benefit on smaller amounts.

Source: Plan your retirement income