Tax-free lump sum allowances for pensions

At any time from age 55 (57 from April 2028), you can usually take up to 25% of your pension as a tax-free lump sum. 

If you have a defined contribution (DC) pension, your entire pension can also be inherited tax-free if you die before the age of 75, in most cases. 

You might still need to pay some tax, however, if the lump sums are over these allowances: 

• Lump sum allowance (LSA): When you take part or all of your pension as a lump sum, 25% is usually tax-free unless it's more than the current LSA, £268,275. You will be charged tax at your marginal rate on any amount over the LSA. 
• Lump sum and death benefit allowance (LSDBA): The limit on all tax-free lump sums from your pensions is £1,073,100. This includes lump sums taken: 
  • when you’re alive (which also count towards the LSA) 
  • if you receive a serious ill-health lump sum before age 75 – typically if your life expectancy is less than a year 
  • if you die before age 75 and your beneficiaries (those inheriting your pension) receive the money within two years – known as a death benefit. 

When you take your pension as a regular income, rather than as a lump sum, you’ll pay Income Tax on anything above your Personal Allowance. See A guide to tax in retirement for more information.  

Whenever you take money from a pension, your pension provider will ask if you’ve ever accessed a pension before. This is so they know how much tax-free cash you’ve already taken.  

For example, say you had three untouched pension pots worth £400,000, £800,000 and £80,000. If you took £100,000 tax-free cash from the first pot, your LSA of £268,275 would be reduced to £168,275.  

This means you can only take this amount from the others before paying tax, rather than 25% of the money.  

If you took some pensions before 6 April 2024, you might benefit from a transitional tax-free amount certificate.

The lump sum allowance (LSA) is £268,275. 

You generally won’t be affected by the LSA if the total value of your pensions (excluding the State Pension) is less than £1,073,100. The LSA is 25% of this amount, meaning the tax-free limit is usually £268,275. 

The amount of tax-free cash you can take from your pension is normally limited to a quarter of your total pensions. So, if 25% of your pensions adds up to more than the LSA of £268,275, you could receive less than 25% tax free. 

The total value of your pensions includes both pensions you have and haven’t taken yet. 

If your pensions’ value is over the allowance (or if it might be when you retire), you’ll pay tax on anything you take over the limit. Your pension provider will calculate this based on normal Income Tax rules.  

This means the taxable money from your pension lump sum is added to any other taxable income (like a salary or other pension income). The total figure for that tax year is then used to work out how much tax you’ll pay. 

There are three types of lump sum that don’t count towards the LSA. This means your allowance won’t reduce if: 

• You’re taking your whole defined benefit pension in one go and all your pensions are worth less than £30,000 – known as a trivial commutation lump sum.
• You’re taking a pension that’s worth £10,000 or less in one go – called a small pot lump sum.
• Your pension scheme is closing and your full lump sum is less than £18,000 – known as a winding up lump sum. 

Your allowance might be higher if you have, or apply for, lifetime allowance protection. 

The lump sum and death benefit allowance (LSDBA) is £1,073,100.  

This is the maximum tax-free lump sums that you and your beneficiaries (the person or people who get your pension after you die) can receive from your pension. 

You or your beneficiaries generally won’t be affected by the LSDBA if the total value of your pensions (excluding the State Pension) is less than £1,073,100. This includes pension money you have and haven’t taken yet. 

If your pension is higher than the LSDBA, you or your beneficiaries will usually pay tax on anything above the limit. Your pension provider would calculate this based on normal Income Tax rules. 

The main exception is when a death benefit is being paid from a pension that was already accessed before 6 April 2024. In these cases, if you die under the age of 75, the whole amount is tax-free and doesn’t reduce your LSDBA, because it falls under the old lifetime allowance (LTA) rules. 

All money left in your pension could be paid tax-free if: 

• you die under age 75 with a defined contribution pot, and  
• instead of taking a lump sum, your beneficiaries use the money to buy a: 
  
  • beneficiary’s drawdown pot to keep it invested until they need it, or  
  • beneficiary’s annuity to take a guaranteed income. 

It’s worth checking what options your provider would offer to your beneficiaries. They may wish to consider annuities or drawdown to reduce the tax charges. 

Your allowance might be higher if you have, or apply for, lifetime allowance protection. 

For more information see What happens to my pension when I die? 

If you took money from your pension before 6 April 2024, it counted towards the lifetime allowance (LTA) instead. 

The LTA was the maximum amount you could save into a pension without needing to pay additional tax. This was £1,073,100 when it ended on 5 April 2024.  

The key difference between the old and new allowances is that the lifetime allowance LTA applied however you took money from your pensions. The new lump sum allowance (LSA) and lump sum and death benefit allowance (LSDBA) only look at tax-free lump sums you take – either in your lifetime or after you’ve died. 

This means any tax-free lump sums you’ve taken under the LTA or before April 2006 will count towards your LSA and LSDBA. To work this out, your pension provider will usually: 

1. Take the amount of LTA you had used on 5 April 2024.  
2. Assume you received a quarter as tax-free cash. 
3. Reduce your available LSA and LSDBA by this amount.  

Your pension providers will already have told you how much of the LTA you’ve used, but you can ask them if you don’t know.  

If you didn’t take a quarter as tax-free cash, you can apply for a transitional tax-free amount certificate to prove how much you actually received. 

If you had the option to take a tax-free lump sum before 6 April 2024, but you chose not to, you might find your LSA has still been reduced as if you had. For example, if you decided to take less than 25% before the pension started.  

It might also have been reduced if you took pension money between 6 April 2016 and 5 April 2020 when the lifetime allowance was lower.    

If this is the case, you can get a transitional tax-free amount certificate. This is proof of the tax-free amounts you’ve actually taken, and means your remaining lump sum allowance might increase. 

You can usually ask for a certificate from the first pension provider you take money from after 5 April 2024. They’ll want to see evidence of the actual amount of tax-free cash you took.  

You can then show the certificate to any other pension provider you’d like to take money from. They will use the tax-free cash figure shown on the certificate, rather than assuming you’ve taken the maximum 25%.

There are two types of protection that can increase your tax-free allowances. The application deadline for both of these is 5 April 2025.

For example, if you have Fixed Protection 2016, your LSA is £312,500 and your LSDBA is £1,250,000, which are higher than the usual allowances. 

You can apply online for pension protection at GOV.UKOpens in a new window or by calling the HMRC Pensions helpline on 0300 123 1079Opens in a new window.

This is a complex area. If you think you or your beneficiaries could be affected by the LSA or LSDBA, you may wish to speak to a regulated financial adviser or get specialist tax advice before making any decisions.  

See Find a retirement adviser for more help.

If you’re looking to transfer your pension abroad, an overseas transfer allowance (OTA) will apply. This applies to all transfers since 6 April 2024.  

See Moving a UK pension overseas or moving an overseas pension to the UK for more information.