What is the maximum tax-free lump sum you can take from a pension?
You can normally take 25% of a defined contribution pot free of Income Tax, subject to an overall cap of £268,275 across every pension you hold. The percentage is well known; the cap is not, and because it is a fixed cash figure rather than a percentage, it catches more people every year that pots grow.
- The percentage: 25% of the amount crystallised, taken as a pension commencement lump sum.
- The cap: £268,275 in total across all pensions — the lump sum allowance.
- The freeze: the cap is a cash figure, so pot growth erodes it in real terms every year.
- The exception: transitional and enhanced protections can raise it, and some schemes have scheme-specific rights above 25%.
01 The 25% is per crystallisation, not per lifetime
The tax-free lump sum is 25% of the amount you crystallise, not 25% of everything you own, and this is what makes phased access possible. Crystallise £100,000 of a £400,000 pot and you can take £25,000 tax free; the other £300,000 stays uncrystallised and carries its own future entitlement. Nothing forces you to crystallise the whole pot in one go, and nothing is lost by waiting.
The formal name is a pension commencement lump sum, and it has to be paid in connection with becoming entitled to a pension from the same arrangement — which is why it is normally taken as you move funds into drawdown or buy an annuity. Taking it and doing nothing else with the rest is the most common opening move in drawdown.
Defined benefit schemes work differently. There is no pot to take a quarter of; instead the scheme offers a lump sum in exchange for giving up annual pension, at a commutation factor the scheme sets. The 25% test is applied to a notional capital value rather than to a balance you can see.
02 The cap, and why it is the binding constraint
The lump sum allowance is £268,275, and it caps the total tax-free cash you can take across every pension you hold. It replaced the 25%-of-the-lifetime-allowance calculation when the lifetime allowance was abolished in April 2024, and it was set at exactly 25% of the old £1,073,100 figure — so the cap did not change, only the machinery around it.
Because it is a cash amount rather than a percentage of anything, it binds at a total pot of £1,073,100 and everything above that produces no further tax-free cash. Anyone whose pensions are heading toward seven figures is therefore planning against a fixed number while their pot grows, and the proportion of the pot that can come out tax free falls every year.
The cap is measured across all schemes together, and it is the individual's responsibility to track. Providers know what they have paid; none of them knows what the others have paid, so a person with four pots is the only party with the complete picture.
Shows: the tax-free cash available from your total pensions, and whether the £268,275 cap or the 25% rule is the binding constraint. Ignores: protections that raise your allowance, scheme-specific rights above 25%, defined benefit commutation factors, and tax on the remainder.
On the defaults above, the worked example shows £125,000. The 25% rule binds; the allowance has £143,275 of headroom left.
Source: Lifetime allowance and the allowances that replaced it
03 Protections and scheme-specific rights
Some people can take more than £268,275, and the two routes are separate. Transitional protections from earlier reductions in the lifetime allowance — fixed and individual protection in their various vintages — carry a higher personal lump sum allowance, and they survived the 2024 abolition. Keeping the paperwork matters: the protection is only useful if it can be evidenced to a provider.
Separately, a minority of older occupational schemes give a scheme-specific right to more than 25% of the fund, usually because of pre-2006 rules. That right is attached to the scheme, and it is normally lost on transfer — which turns an apparently sensible consolidation into an expensive one. Checking for it before moving a pot is a five-minute question to the administrator and occasionally worth tens of thousands.
The 25% figure is so well known that people plan around it and never check the cap, and the cap is the half that is frozen. At a million pounds of pension savings it makes no difference; at one and a half million, a quarter of the pot is £375,000 and you can have £268,275 of it. If your pensions are on that trajectory, the tax-free proportion of your retirement is shrinking every year without anything being announced. That is not an argument against pension saving — the relief still wins — but it is an argument for knowing which of the two rules is going to bind for you.
FAQ
Do I have to take the whole 25% at once?
No. The 25% applies to whatever you crystallise, so you can crystallise part of a pot, take a quarter of that, and leave the rest untouched with its own future entitlement. Phasing is the default in drawdown rather than the exception.
Does taking tax-free cash trigger the money purchase annual allowance?
No. Taking the pension commencement lump sum alone leaves your full annual allowance intact. It is taxable income taken flexibly that triggers the reduction, which is why the sequence of withdrawals matters more than the amounts.
What happens if I go over the lump sum allowance?
The excess is not tax-free. It is taxed as income at your marginal rate when paid, so the practical effect is that lump sums above £268,275 are simply pension income taken in one lump — usually a worse outcome than spreading it.
Sources
Regulator references
- Tax on your private pension contributions · GOV.UK · 2025The relief, allowance and charge framework the whole post sits inside.Last verified: 2026-09-07
- Lifetime allowance and the allowances that replaced it · GOV.UK · 2025The lump sum allowance rules that replaced the lifetime allowance from April 2024.Last verified: 2026-09-07
- Pension schemes: protect your lifetime allowance · HM Revenue and Customs · 2025Which protections survive the 2024 abolition and what they still buy.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.