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What is the pension tax-free lump sum and how to take it

Journalist: Rachel Wait, Freelance

ended 18. September 2024

Looking for comment on any of the following points: 

  • What is the Pension Tax-Free Lump Sum?
  • Calculating Your Tax-Free Lump Sum Allowance
    • Factors Affecting the Allowance
    • How to Check Your Remaining Allowance
       
  • How to take your tax-free lump sum
  • Maximizing Your Tax Benefits
    • Is the 25pc tax-free pension lump sum under threat?
    • Can you take 25pc tax-free from two different pensions?
    • What is the tax-free lump sum drawdown for pension?

3 responses from the Newspage community

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Editor
Ross Lacey
Director & Independent Financial Adviser at Fairview Financial Management
Pensions usually have 25% available as a tax free lump sum. The 25% is based on the value of the pot, and is currently limited to £268,275 across all pensions. Some older pensions can have more than 25% tax free available so it's important to check this.

Pensions that haven't yet had tax free cash taken from them are referred to as "uncrystallised" whereas those that have are "crystallised".

Not all tax free cash has to be taken in one go, so for example a £250,000 pension pot that's uncrystallised would currently have £62,500 tax free cash available.

If £10,000 is drawn out, £2500 could be tax free cash, and the remaining £7500 taxable.

This would leave £240,000 in the uncrystallised pot, and £60,000 of remaining tax free cash.

The remaining tax free cash is however based on the prevailing value of the uncrystallised pot, so if the £240,000 grew back to £250,000, then there would be £62,500 of tax free cash available again. This works both ways though if it drops in value!
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Joshua Gerstler
Chartered Financial Planner at The Orchard Practice
The Pension Commencement Lump Sum (PCLS) is a tax free payment you can take from your pension pot. It normally amounts to 25% of the total value of your pensions.

If you ever think about transferring any of your pensions, it is important to first check what the percentage PCLS is for the existing pension.

Some pensions have Protected Tax Free Cash which means you are entitled to more than 25% tax free.

Nobody wants to pay more tax than they have to and so this is a benefit you do not want to give away without good reason.

We look after a gentleman who had an old pension. We carried out financial forensics on his pension and discovered that he had 100% Tax Free Cash! This meant that he could take the entire pension, all £201,000 of it, without paying any Income Tax on it.
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David Robinson
Co-Founder at Wildcat Law
A common misconception is that PCLS (tax free cash) needs to be taken all at once, it doesn't. In fact unless you really need to take it all together you are far better using it in conjunction with taxable withdrawals to make your drawdown income more tax efficient.
For example you have a £400,000 pension pot. £100,000 of which would be PCLS and £300,000 available for taxable income.
You want to take £20,000 net income per year.
You can draw up to £12,570 from "taxable" income each tax year before paying income tax, you draw £7,430 PCLS to top up your income.
That way you receive £20,000 without having to pay income tax.

The remaining pension stays invested and hopefully growing. It also maintains the IHT benefits of being in a pension/drawdown pot.