Understanding how much tax-free cash you can get from your pension is essential for retirement planning. Here’s how to calculate it for every type of pension.
Tax-Free Lump Sum Basics
The 25% Rule
| Rule | Detail |
|---|---|
| Standard entitlement | 25% of pension pot |
| Tax-free portion | Entire 25% |
| Maximum tax-free (lifetime) | £268,275 |
| When can you access | From age 55 (rising to 57 in 2028) |
| Applies to | Most defined contribution pensions |
Key Limits 2026/27
| Limit | Amount |
|---|---|
| Lump Sum Allowance (LSA) | £268,275 |
| Lump Sum and Death Benefit Allowance (LSDBA) | £1,073,100 |
The LSA is the maximum tax-free cash you can take across all your pensions during your lifetime. The LSDBA includes death benefits as well.
Defined Contribution Pension Calculator
Simple 25% Calculation
| Pension Pot Value | Tax-Free Lump Sum (25%) |
|---|---|
| £50,000 | £12,500 |
| £100,000 | £25,000 |
| £150,000 | £37,500 |
| £200,000 | £50,000 |
| £300,000 | £75,000 |
| £400,000 | £100,000 |
| £500,000 | £125,000 |
| £750,000 | £187,500 |
| £1,000,000 | £250,000 |
| £1,073,100+ | £268,275 (max) |
What’s Left After Taking Lump Sum
| Pot Size | Tax-Free (25%) | Remaining (75%) |
|---|---|---|
| £100,000 | £25,000 | £75,000 |
| £200,000 | £50,000 | £150,000 |
| £300,000 | £75,000 | £225,000 |
| £500,000 | £125,000 | £375,000 |
The remaining 75% can be:
- Left invested (drawdown)
- Taken as taxable income over time
- Used to buy an annuity
- Taken all at once (heavily taxed)
Defined Benefit (Final Salary) Pension Calculator
How It Works
Final salary pensions are more complex. The tax-free lump sum is based on the “capital value” of the pension.
Capital value formula: Capital Value = Annual Pension × 20 (typical multiplier)
Tax-free lump sum: Maximum = 25% of Capital Value
Calculation Examples
| Annual Pension | Capital Value (×20) | Max Tax-Free Lump Sum |
|---|---|---|
| £10,000 | £200,000 | £50,000 |
| £15,000 | £300,000 | £75,000 |
| £20,000 | £400,000 | £100,000 |
| £25,000 | £500,000 | £125,000 |
| £30,000 | £600,000 | £150,000 |
| £40,000 | £800,000 | £200,000 |
| £50,000 | £1,000,000 | £250,000 |
Commutation: Trading Pension for Lump Sum
Most defined benefit schemes let you “commute” some pension for extra lump sum.
Typical commutation rate: £12-£20 of lump sum per £1 of annual pension given up
Example:
- Starting pension: £20,000/year
- Standard lump sum: £60,000 (3× pension)
- Want maximum lump sum: £100,000
- Extra lump sum needed: £40,000
- At 12:1 commutation: Give up £3,333/year pension
- Reduced pension: £16,667/year
| Option | Lump Sum | Annual Pension |
|---|---|---|
| Standard (3× pension) | £60,000 | £20,000 |
| Maximum (25% of value) | £100,000 | £16,667 |
| No lump sum | £0 | £22,000 (approx) |
Is Commutation Worth It?
| Factor | Favours Lump Sum | Favours Higher Pension |
|---|---|---|
| Life expectancy | Poor health | Good health |
| Other income | Need cash now | Have other sources |
| Inflation protection | Pension isn’t indexed | Pension is index-linked |
| Inheritance | Want to pass on wealth | N/A |
| Tax position | Higher rate taxpayer | Basic rate taxpayer |
Multiple Pensions
Calculating Total Tax-Free Entitlement
If you have several pensions, each has its own 25% entitlement, but the total is capped at £268,275.
Example: Three pensions
| Pension | Value | 25% Entitlement |
|---|---|---|
| Workplace DC | £150,000 | £37,500 |
| Old employer DC | £80,000 | £20,000 |
| SIPP | £200,000 | £50,000 |
| Total | £430,000 | £107,500 |
Total is under £268,275, so full amount is tax-free.
Example: Large pensions
| Pension | Value | 25% Entitlement |
|---|---|---|
| Final salary (value) | £800,000 | £200,000 |
| DC pension | £400,000 | £100,000 |
| Total entitlement | £300,000 | |
| LSA limit | £268,275 | |
| Tax-free amount | £268,275 | |
| Taxable excess | £31,725 |
The £31,725 excess would be taxed as income.
Small Pot Rules
Taking Small Pots Entirely
Pensions under certain limits can be taken entirely with only 25% tax-free:
| Small Pot Rule | Limit | Tax-Free | Taxable |
|---|---|---|---|
| Trivial commutation (DB) | £30,000 total | 25% | 75% |
| Small pot (DC) | £10,000 each | 25% | 75% |
| Number of small pots | 3 maximum |
Example: Small pot
- Pension pot: £8,000
- Tax-free portion: £2,000 (25%)
- Taxable portion: £6,000 (75%)
Small Pot Advantages
- Doesn’t affect your Money Purchase Annual Allowance
- Doesn’t count towards Lump Sum Allowance
- Quick way to consolidate small pensions
- Up to 3 small pots can be treated this way
Tax on Amounts Over 25%
How Additional Withdrawals Are Taxed
Anything beyond the 25% tax-free is added to your income for the year.
2026/27 Income Tax Rates:
| Band | Rate | On Income |
|---|---|---|
| Personal allowance | 0% | Up to £12,570 |
| Basic rate | 20% | £12,571-£50,270 |
| Higher rate | 40% | £50,271-£125,140 |
| Additional rate | 45% | Over £125,140 |
Tax Calculation Examples
Example 1: Basic rate taxpayer
| Item | Amount |
|---|---|
| Other income | £25,000 |
| Pension withdrawal (total) | £40,000 |
| Tax-free (25%) | -£10,000 |
| Taxable pension | £30,000 |
| Total taxable income | £55,000 |
| Tax: £12,570 at 0% | £0 |
| Tax: £37,700 at 20% | £7,540 |
| Tax: £4,730 at 40% | £1,892 |
| Total tax on withdrawal | £9,432 |
Example 2: Taking full pot
| Item | Amount |
|---|---|
| Pension pot | £100,000 |
| Tax-free (25%) | £25,000 |
| Taxable | £75,000 |
| Other income | £0 |
| Tax calculation: | |
| £12,570 at 0% | £0 |
| £37,700 at 20% | £7,540 |
| £24,730 at 40% | £9,892 |
| Total tax | £17,432 |
| Net received | £82,568 |
Phased Withdrawal Calculator
Taking Lump Sums Over Multiple Years
Strategy: Take smaller amounts each year to stay in lower tax bands.
Example: £200,000 pot, no other income
| Year | Withdrawal | Tax-Free | Taxable | Tax | Net |
|---|---|---|---|---|---|
| 1 | £50,000 | £12,500 | £37,500 | £4,986 | £45,014 |
| 2 | £50,000 | £12,500 | £37,500 | £4,986 | £45,014 |
| 3 | £50,000 | £12,500 | £37,500 | £4,986 | £45,014 |
| 4 | £50,000 | £12,500 | £37,500 | £4,986 | £45,014 |
| Total | £200,000 | £50,000 | £150,000 | £19,944 | £180,056 |
vs Taking all at once:
| Item | Amount |
|---|---|
| Total pot | £200,000 |
| Tax-free | £50,000 |
| Taxable | £150,000 |
| Tax (pushed into higher bands) | £42,430 |
| Net received | £157,570 |
Saving from phasing: £22,486
UFPLS (Uncrystallised Funds Pension Lump Sum)
How UFPLS Works
Instead of taking 25% tax-free and then separate taxable amounts, UFPLS lets you take ad-hoc lump sums where each one is:
- 25% tax-free
- 75% taxable
Example: £10,000 UFPLS withdrawal
- Tax-free: £2,500
- Taxable: £7,500
- If basic rate: £1,500 tax
- Net: £8,500
UFPLS vs Drawdown
| Feature | UFPLS | Drawdown |
|---|---|---|
| Flexibility | Per withdrawal | Separate tax-free and income |
| Tax-free timing | With each withdrawal | Usually upfront |
| Remaining pot | Stays uncrystallised | Crystallised (counts for MPAA) |
| Good for | Occasional withdrawals | Regular income |
Pension Commencement Lump Sum (PCLS)
What Is PCLS?
PCLS is the technical name for the 25% tax-free lump sum when you “crystallise” (access) your pension.
| Term | Meaning |
|---|---|
| PCLS | Pension Commencement Lump Sum |
| Crystallise | Move pension from growth phase to access phase |
| Uncrystallised | Pension you haven’t accessed yet |
| Crystallised | Pension you’ve started taking from |
PCLS Decision Points
When taking PCLS:
- Must be at least 55 (57 from 2028)
- Can take from one or multiple pensions
- Each pension can only be crystallised once
- Triggers Money Purchase Annual Allowance (£10,000)
State Pension
The state pension has no tax-free lump sum option.
| State Pension Fact | Detail |
|---|---|
| Full new state pension 2026/27 | £12,082/year |
| Tax-free lump sum | None |
| All state pension is | Taxable income |
| Uses personal allowance | Yes (if under £12,570) |
Calculator Summary
Quick Reference Table
| Pension Type | Tax-Free Calculation |
|---|---|
| Defined Contribution | 25% of pot value |
| Defined Benefit | 25% of capital value (usually 20× annual pension) |
| Small pot (<£10,000 DC) | 25% of pot |
| UFPLS withdrawal | 25% of each withdrawal |
| Maximum tax-free lifetime | £268,275 |
| State pension | None |
Planning Checklist
- Calculate total pension values
- Work out 25% of each
- Check against £268,275 limit
- Consider tax on amounts over 25%
- Model phased withdrawal if near tax thresholds
- Factor in other income in retirement years
- Consider whether lump sum or higher income suits you better