How much of my pension is tax-free?
The 25% rule is the same as it has always been at the per-pot level — the change in April 2024 was at the lifetime level, where the old Lifetime Allowance became the new Lump Sum Allowance and Lump Sum and Death Benefit Allowance. Use the decision tree below to find which path applies to you. For the mechanics of how to actually take the 25% (PCLS vs UFPLS vs phased withdrawals) see our companion guide on the 25% tax-free cash rules — this page focuses on the tax side: the cap, the protections, and the interactions.
- 1 DC pensions only, combined value under £1,073,100→ 25% of each pot, with the tax-free total capped lifetime at £268,275 (the LSA). Most people are in this group and will never get close to the cap.
- 2 Defined benefit (final salary or career average) pension only→ Your scheme's commutation factor (often 12:1 in the public sector, 15–25:1 in private DB) determines how much lump sum you can take. The tax-free portion is still tested against the £268,275 LSA.
- 3 Mixed DB and DC pensions→ Each crystallisation contributes to the same LSA pool. Coordinate carefully — taking DB cash first can leave less LSA headroom for later DC withdrawals, or vice versa.
- 4 Combined pension wealth above £1,073,100 (rare)→ You may have a protected allowance from the pre-April 2016 transitional protections, lifting your personal LSA above £268,275. Check old HMRC certificates before crystallising anything.
LSA vs LSDBA — two caps, one regime
The two new allowances are easy to confuse because they share the same headline figure (the £1,073,100 LSDBA matches the old LTA exactly, and the £268,275 LSA is exactly 25% of it). They do different jobs. The LSA caps tax-free lump sums you take during your life; the LSDBA caps tax-free lump sums you take during your life plus tax-free lump sum death benefits paid to your beneficiaries. Every lifetime tax-free lump sum reduces both — but tax-free death benefits only reduce the LSDBA.
| Allowance | Standard cap | Tested when | Includes |
|---|---|---|---|
| Lump Sum Allowance (LSA) | £268,275 | At each PCLS or UFPLS withdrawal | All tax-free lump sums paid in your lifetime |
| Lump Sum & Death Benefit Allowance (LSDBA) | £1,073,100 | At each lifetime event and at death | All tax-free lump sums in life + tax-free lump sum death benefits before age 75 |
Two practical implications worth pinning down. First: regular pension income (drawdown withdrawals, scheme pensions, annuity payments) is not tested against either allowance — only lump sum payments are. So an £850,000 DC pot taken entirely as drawdown income, with no PCLS, uses none of your LSA at all (and pays full income tax on every withdrawal). Second: the LSDBA tests death benefits paid as lump sums, not as ongoing dependants' pensions or beneficiary drawdown. A nominated drawdown account left for a beneficiary doesn't use LSDBA at the point of death; only an actual lump sum payment does.
Worked examples — three retirees, three answers
The same £268,275 cap lands very differently depending on what you have and how you choose to take it. Three illustrative cases:
| Profile | Tax-free cash available | LSA used | Notes |
|---|---|---|---|
| DC pot of £400,000 | Up to £100,000 | £100,000 of £268,275 | Comfortably inside LSA. Can also take less in slices via UFPLS. |
| £1m DC pot + £200k DB pension capital value | Up to £268,275 | £268,275 of £268,275 | 25% would be £300k — capped at LSA. Above £1.073m total triggers LSDBA testing too. |
| £600k DC with primary protection from 2006 | Up to ~£375,000 protected | Personal LSA above £268,275 | Primary protection certificates give a personal LSA — check the HMRC reference. |
Defined benefit schemes — the 12:1 trap
Most public-sector schemes (NHS, Teachers', Civil Service, Armed Forces, Local Government) offer commutation at around 12:1 — every £1 of annual pension you give up generates £12 of lump sum. A fair actuarial rate for an inflation-linked guaranteed income at age 65 is closer to 20–25:1. Members trading pension for lump sum at 12:1 are usually selling a valuable inflation-linked income too cheaply.
Worked example — NHS member, age 60, £30,000/year pension. Maximum commutation under most NHS rules is around 25% of the capital value, valued at 20:1: that's a lump sum of roughly £120,000, in exchange for giving up around £10,000/year of pension. New annual pension: £20,000. The £120,000 is tax-free (well within the LSA). But the £10,000/year you've surrendered, inflation-linked for life, would have paid out an estimated £200,000+ over a typical 20-year retirement in real terms. Break-even is around year 12.
Some private-sector DB schemes — particularly those still open — offer better factors of 15–25:1. Always ask your scheme administrator for the exact commutation factor for your retirement date before deciding. A scheme paying 22:1 may genuinely justify taking the maximum cash; a scheme paying 12:1 usually does not, unless you have a specific use for the money.
Inline calculator — your tax-free entitlement
All SIPPs and workplace DC pots combined.
Annual amount before commutation.
Public-sector default is 12; ask your scheme.
From any previous PCLS or UFPLS.
Total tax-free cash available across these pensions: £100,000
This uses £100,000 of your remaining £268,275 Lump Sum Allowance. Anything taxable above the 25% slice is taxed as income at your marginal rate. The figure assumes no protected lump sum from pre-2016 protections; certificates can lift your personal LSA materially.
Illustrative only. DB schemes often cap commutation at 25% of the scheme capital value (using the 20:1 HMRC factor); some schemes cap it lower. Always ask your scheme administrator for the actual lump sum quote at your chosen retirement date before committing.
Three real scenarios
Situation: Just hit State Pension age. Wants to take some tax-free cash to fund a home renovation and a year of low-key travel.
Olivia's combined DC pot is £500,000. Maximum tax-free cash under the 25% rule is £125,000 — well inside the £268,275 LSA. She doesn't need it all at once and doesn't want the rest sitting in a current account losing value to inflation.
- Year 1: Crystallises £80,000 from the SIPP — takes £20,000 as PCLS, designates £60,000 to drawdown. LSA used: £20,000.
- Year 3: Crystallises £200,000 from the workplace pot — takes £50,000 PCLS, leaves £150,000 in drawdown. LSA used now: £70,000.
- Year 6: Takes a final £55,000 PCLS slice from the SIPP. LSA used: £125,000 of £268,275. £143,275 still available if she ever needs it.
Crystallising in stages means Olivia leaves more of the pot growing tax-free and (under current rules until April 2027) outside her estate for IHT. Once a lump sum is taken it sits in her ordinary savings, which is taxed on the interest and counts toward her estate.
Situation: Retiring from the NHS. Tempted by the maximum lump sum of around £160,000. Wondering whether to take it.
The NHS rules cap commutation at roughly 25% of the capital value (valued at 20:1 plus the lump sum). For a £40,000/year pension that maximum is around £171,000 of lump sum in exchange for ~£14,250/year of pension — leaving Patricia with about £25,750/year of NHS pension instead of £40,000. The lump sum is tax-free and uses £171,000 of her £268,275 LSA.
- Option A — take max lump sum: £171,000 tax-free + £25,750/year
- Option B — take no lump sum: £0 cash + £40,000/year
- The maths over 20 years: Option B pays roughly £285,000 more in pension (£14,250 × 20). Option A's £171,000 invested at 4% real return over 20 years grows to about £375,000 — better in nominal terms, but pension increases are inflation-linked and investment returns are not guaranteed.
- Break-even: roughly year 12–13. Below average life expectancy at 65 (84 for women), Option A wins. Above it — most members — Option B wins. But Option B requires no investment skill and is fully insured against running out.
If Patricia has high-interest debt or a specific genuine use for £80,000–£120,000 of cash, a partial commutation (giving up only £6,000–£10,000/year of pension) often makes more sense than maxing out at 12:1.
Situation: Retiring next year. Wants the maximum tax-free cash but worried about hitting the LSA — and the LSDBA.
Andrew's headline 25% on the DC alone is £300,000 — that already breaches the £268,275 LSA by £31,725. Add any DB commutation and the breach grows. The £20,000 DB capitalised at 20:1 is £400,000, taking his combined pension value to £1.6 million — above the £1,073,100 LSDBA too.
- Maximum tax-free cash: £268,275 (the LSA). Anything paid as a lump sum above that is taxed as income at his marginal rate, so almost certainly 40% or 45%.
- Sequencing: taking PCLS from the DC first uses up the LSA quickly, leaving no headroom for any DB tax-free commutation. A common plan is to take a smaller PCLS, leave more in drawdown, and use any DB commutation at a fair commutation rate to fill the LSA.
- LSDBA implications: any tax-free death benefit lump sum paid to his beneficiaries before age 75 would use his remaining LSDBA. From April 2027 unused pension funds also start to count toward his estate for IHT — see the IHT on pensions guide.
Andrew's case is the one where regulated advice has the highest probable value. The interaction between LSA, LSDBA, scheme commutation factors and the April 2027 IHT change rewards a properly modelled plan.
Pre-2016 protections — your personal LSA may be higher
The £268,275 figure is the standard LSA. Several groups have a higher personal LSA under transitional protections introduced as the old Lifetime Allowance ratcheted downwards. These carried into the post-LTA regime and give you a protected higher tax-free entitlement.
- Primary protection (2006): for those whose funds exceeded £1.5m at 5 April 2006. Gives a personal LSA tied to the primary protection factor.
- Enhanced protection (2006): preserves the actual lump sum entitlement that was in place on 5 April 2006 — can be over £375,000 in some cases.
- Fixed Protection 2012 / 2014 / 2016: locks in a personal LSA of £450,000 / £375,000 / £312,500 respectively (25% of £1.8m / £1.5m / £1.25m). Applications for FP2016 closed on 5 April 2025.
- Individual Protection 2014 / 2016: gives a personal LSA based on the value of pension savings on 5 April 2014 or 5 April 2016. Also closed for new applications on 5 April 2025.
- Scheme-specific lump sum protection: separate regime for pre-A-Day (April 2006) lump sum rights of more than 25% in one specific scheme — full detail in HMRC PTM063130.
If you registered for any of these, you have a paper or digital HMRC certificate with a reference number. Dig it out before crystallising — many providers won't apply protection unless you tell them. People with primary or fixed protection have lost meaningful sums by not flagging it when taking a PCLS.
April 2027 — the inheritance tax change moves the goalposts
Until 5 April 2027, most unused pension funds and death benefits sit outside your estate for inheritance tax — one of the strongest tax shelters in UK financial planning. From 6 April 2027, unused pension wealth (including DC drawdown pots and certain lump sum death benefits) starts to count toward the deceased's estate for IHT, unless paid to a surviving spouse, civil partner or registered charity. The Treasury estimates around 10,500 estates a year will become newly subject to IHT as a result.
This makes the decision to take tax-free cash more nuanced, not simpler. Money drawn out of the pension and parked in savings or a current account joins your estate immediately. Money left in the pension stays sheltered until April 2027, then is in scope (though at age 75+ the existing income-tax-on-the-beneficiary rule still applies — a potential double tax bite up to ~67% effective rate, on which the Treasury is consulting). Full breakdown: inheritance tax on pensions.
Small pots — outside the LSA
Pension pots worth £10,000 or less can be paid out as a one-off cash lump sum under the "small pots" rules without using your Lump Sum Allowance. Each payment is 25% tax-free and 75% taxable through PAYE.
- Personal pensions: up to three small pots of up to £10,000 each, lifetime cap of three.
- Occupational pension schemes: unlimited number of small pots, each up to £10,000.
- Trivial commutation: if all your pension rights across every scheme total £30,000 or less, you can take the lot as one lump sum (25% tax-free, 75% taxable) — also outside the LSA.
This is genuinely useful for clearing up old dormant pots. Combine the small pots rule with Pension Tracing Service searches before drawing your main pension and you can clear several £5,000–£10,000 stragglers tax-efficiently without burning the LSA.
Recycling — the rule that bites unexpectedly
Taking your tax-free cash and then making a significantly larger pension contribution shortly afterwards — to claim fresh tax relief — is treated by HMRC as pension recycling and triggers an unauthorised payment charge of up to 55% on the recycled amount.
The rule bites where all of the following apply: total tax-free cash taken in a 12-month period is over £7,500; your pension contributions go up "significantly" because of it; the increase exceeds 30% of the lump sum over a five-year window (the contribution year plus two each side); and the recycling was pre-planned. The pre-planning test is what catches people out — once you've taken the cash with the intent to top up your pension, HMRC's position is that the rest follows automatically.
Normal annual contributions you'd have made anyway are fine. So is using the cash for anything that isn't a pension contribution. The trap is the "I'll take 25% then put it back to get another 25% later" strategy that sounds clever in a pub conversation and ends with an HMRC charge.
Straight from HMRC
"For the purposes of the lump sum allowance, a relevant benefit crystallisation event occurs when an individual becomes entitled to a relevant lump sum. The tax-free portion of an uncrystallised funds pension lump sum, a pension commencement lump sum and certain other lump sums all use up part of the individual's lump sum allowance. Where a lump sum, or part of a lump sum, exceeds the individual's available lump sum allowance, the excess is treated as a pension under section 579A ITEPA 2003 and taxed at the individual's marginal rate."
Source: HMRC Pensions Tax Manual — PTM173000: lump sum allowance and lump sum and death benefit allowance. Last updated 2026.
Frequently asked questions
- What is the maximum tax-free lump sum I can take from my pension?
- For most people, the maximum tax-free cash you can take across all your registered UK pensions during your lifetime is £268,275 — this is the Lump Sum Allowance (LSA), set on 6 April 2024 when the old Lifetime Allowance was abolished. From each defined-contribution pot you can take 25% tax-free, subject to that £268,275 lifetime ceiling. Some people have higher protected allowances under primary, enhanced or fixed protection from earlier regimes — you would already have an HMRC certificate or reference number if so. Defined benefit (final salary) schemes also let you commute pension into a lump sum, with the tax-free portion still tested against the LSA. The £268,275 figure is fixed in legislation and was confirmed unchanged at Autumn Budget 2025.
- What is the Lump Sum Allowance?
- The Lump Sum Allowance (LSA) is the lifetime cap on the total tax-free element of pension lump sums you can take during your life. It was introduced on 6 April 2024 to replace the Lifetime Allowance and is set at £268,275 — the same as 25% of the final £1,073,100 LTA. Every time you take a pension commencement lump sum (PCLS), the tax-free part of an uncrystallised funds pension lump sum (UFPLS), or certain other authorised lump sums, the tax-free portion reduces what is left of your LSA. Anything paid above your remaining LSA is treated as taxable income at your marginal rate. The LSA is tested at each "relevant benefit crystallisation event" — HMRC technical name for the moment you take the cash. Full definition: HMRC PTM173000.
- Did the Lifetime Allowance get abolished?
- Yes. The Lifetime Allowance (LTA) was formally abolished on 6 April 2024 by the Finance Act 2024. The LTA had capped the total value of pension benefits you could accumulate tax-favourably (last set at £1,073,100), with a tax charge on any excess when crystallised. It has been replaced by three new allowances that focus only on tax-free amounts: the Lump Sum Allowance (LSA, £268,275), the Lump Sum and Death Benefit Allowance (LSDBA, £1,073,100), and the Overseas Transfer Allowance (OTA, equal to the LSDBA). Pension income beyond these tax-free amounts is simply taxed as income — there is no separate lifetime cap on the size of pension you can build. Old LTA protections (primary, enhanced, fixed, individual) carried across and now generally give a protected higher LSA and LSDBA.
- How does the LSDBA work?
- The Lump Sum and Death Benefit Allowance (LSDBA) is the second of the post-LTA caps. It is set at £1,073,100 for most people and limits the total tax-free lump sums paid both during your life and on your death. Tax-free lump sums you take while alive (PCLS, the 25% slice of UFPLS, serious-ill-health lump sums) use up both your LSA and your LSDBA. Tax-free lump sum death benefits paid before age 75 then use whatever LSDBA you have left. Anything above the LSDBA when paid as a lump sum becomes taxable in the recipient's hands. From 6 April 2027 a separate change brings unused pension funds into the deceased's estate for IHT, so the LSDBA and IHT rules will work together — see our inheritance tax on pensions guide for the new combined picture.
- Can I take 25% tax-free from each of my pensions?
- Yes — the 25% rule applies pot by pot, but with one important catch: the total tax-free element across all your pensions is still capped at the £268,275 LSA. From each defined-contribution pension you can take up to 25% as a tax-free PCLS, or take a series of partial withdrawals (UFPLS) where 25% of each withdrawal is tax-free and 75% is taxable. You can take 25% from a workplace pension, then later 25% from a SIPP, then later 25% from a personal pension — each is treated separately for the 25% calculation, but each draws on the same £268,275 lifetime LSA. For a £400,000 combined DC pot the 25% maximum (£100,000) sits comfortably inside the LSA. For a £1.5 million combined pot, 25% would be £375,000 — but you would be capped at £268,275 unless you have a protected allowance.
- What is the tax-free lump sum from a defined benefit pension?
- In a defined benefit (final salary or career average) scheme, the tax-free lump sum is calculated using your scheme's commutation factor — the amount of lump sum you receive for each £1 of annual pension you give up. A typical public-sector factor is around 12:1, meaning £12 of lump sum for every £1 of pension surrendered. The tax-free portion is the lower of (a) the scheme rules' maximum, and (b) 25% of the capital value of your benefits, valued for HMRC purposes at 20:1 plus the lump sum. In practice that often produces a maximum tax-free cash of around 4.28 × the annual pension you keep. The result is still tested against your remaining £268,275 LSA. Public-sector schemes typically offer poor value commutation (12:1 versus an actuarially fair ~20–25:1) — the lump sum is real money, but you may be selling your inflation-linked guaranteed income too cheaply.
- Can I take more than £268,275 tax-free?
- Generally no — £268,275 is the lifetime ceiling for everyone without a transitional protection. But several groups have higher protected allowances. Primary protection (registered before April 2009, on funds over £1.5m at 5 April 2006) can give a protected LSA up to £375,000 plus indexation. Enhanced protection (registered by April 2009) can preserve the actual lump sum entitlement at 5 April 2006. Fixed protection 2012, 2014 and 2016 lock in higher LSA figures of £450,000, £375,000 and £312,500 respectively (25% of £1.8m, £1.5m and £1.25m). Scheme-specific protection — a separate regime for pre-6 April 2006 ("A-Day") lump sum rights — can give more than 25% from one particular scheme. If you have any of these, you will already have an HMRC reference number; dig out the old certificate before crystallising.
- What is a protected lump sum?
- A protected lump sum is a tax-free entitlement greater than the standard £268,275 LSA, secured under one of the transitional protections introduced as the Lifetime Allowance ratcheted down between 2006 and 2016. The main routes are primary protection (April 2006), enhanced protection (April 2006), fixed protection 2012/2014/2016, and individual protection 2014/2016. There is also the separate scheme-specific lump sum protection for pre-A-Day pension rights where you had a lump sum right above 25% as at 5 April 2006. All of these carried into the new post-LTA regime — your protected lump sum amount becomes your personal LSA (and the maximum tax-free element you can take). Applications for the most recent — Fixed Protection 2016 and Individual Protection 2016 — closed on 5 April 2025. You cannot apply for new protections now.
- Are small pots subject to the LSA?
- No. Small pension pots paid as a one-off cash lump sum under the "small pots" rules do not count against your Lump Sum Allowance. You can take up to three small pots of up to £10,000 each from personal pensions (and an unlimited number from occupational pension schemes) as a cash lump sum without triggering a relevant benefit crystallisation event. Each payment is 25% tax-free and 75% taxable through PAYE. Trivial commutation lump sums — for those whose total pension rights are under £30,000 — are also paid 25% tax-free / 75% taxable and do not use LSA, though they do require LSA to be available. These rules are genuinely useful for clearing up tiny old pots without burning through your main LSA on big pensions later.
- Will the £268,275 LSA change?
- There is no automatic uprating mechanism in legislation — the £268,275 figure is fixed unless and until Parliament changes it. At Autumn Budget 2025, Chancellor Rachel Reeves explicitly ruled out cutting the tax-free pension lump sum, despite think-tank proposals to reduce the cap to as low as £100,000. The Treasury reportedly abandoned the change after savers withdrew over £70 billion from pensions in 2024/25 — a 36% jump on the previous year — driven by fear of imminent cuts. So for 2026/27 the LSA stays at £268,275. The £1,073,100 LSDBA also stays unchanged. Future Budgets could of course revisit the figure — most pension tax changes in the last decade have moved the cap downward, not upward — so if you are within sight of the LSA, taking it sooner rather than later is a reasonable defensive consideration, set against the other factors discussed on this page.
Sources
Every figure on this page traces back to a primary or near-primary UK source:
- HMRC Pensions Tax Manual — PTM173000: lump sum allowance and lump sum and death benefit allowance. Statutory definition of the LSA, LSDBA and relevant benefit crystallisation events. Source for the £268,275 and £1,073,100 figures and the marginal-rate treatment of any excess.
- HMRC Pensions Tax Manual — PTM063210: pension commencement lump sum (PCLS) payments. The conditions for a payment to qualify as a PCLS — age 55 (57 from 6 April 2028), entitlement, allowance availability, 6-month/12-month payment window.
- HMRC Pensions Tax Manual — PTM063130: scheme-specific lump sum protection overview. The protection regime for pre-6 April 2006 lump sum rights greater than 25%.
- HMRC Pensions Tax Manual — PTM133810: pension recycling overview. The five conditions that trigger the recycling charge and the £7,500 / 30% / five-year tests.
- GOV.UK — Find out the rules about individual lump sum allowances. The post-LTA regime in plain English, including how transitional protections feed into the new LSA and LSDBA.
- MoneyHelper — Tax-free pension lump sum allowances. Government-backed plain-English guide that confirms the £268,275 / £1,073,100 figures and the 25% per-pot rule.
- GOV.UK — Inheritance Tax: unused pension funds and death benefits. HM Treasury policy paper on the 6 April 2027 change bringing pensions into IHT scope — source for the 213,000 estates / 10,500 IHT charge estimate.
- Royal London for Advisers — Lump sum and lump sum death benefit allowances from April 2024. Technical primer used as a cross-check on the LSA and LSDBA mechanics.
- Aberdeen Adviser Techzone — Summary of transitional protections. Cross-check on the protected LSA values for primary, enhanced, fixed 2012/14/16 and individual 2014/16.
- M&G Wealth Adviser — Small pots and defined benefit trivial commutations. Source for the small-pots-do-not-use-LSA rule, the three personal-pension limit, and the occupational-scheme unlimited rule.
- The Private Office — Reeves rules out pension lump sum cut (Autumn Budget 2025). Confirmation that the £268,275 LSA was retained at the November 2025 Budget despite pre-Budget speculation.
- RetirementExpert — The 25% tax-free cash rules (companion guide). Mechanics of how to actually take the 25% — PCLS, UFPLS and phased withdrawals.
- RetirementExpert — Inheritance tax on pensions (April 2027 change). Full coverage of the IHT change and how it interacts with the LSDBA.