How Pension Lump Sums Are Taxed in the UK
When you start taking money from a defined contribution pension, you can usually take up to 25% of the pot as a tax-free lump sum (the pension commencement lump sum). The 25% is measured against the pot, not the cash: take 25% or less and it is all tax-free. Cash taken above that is added to your other income for the year and taxed at your marginal rate.
The up to 25% of a pension pot can normally be taken tax-free, capped by the Lump Sum Allowance of £268,275; anything above that is taxed as income at your marginal rate. The £268,275 cap is a lifetime limit across all your pensions — any tax-free lump sums you have already taken count towards it.
The rest of the pot can stay invested in flexi-access drawdown, buy a lifetime annuity, or be withdrawn in further lump sums — all taxed as income when paid. A common guideline is the 4% drawdown rule, which suggests withdrawing 4% of the remaining pot a year for a sustainable income over 25–30 years.
Frequently Asked Questions
How much tax do I pay on my pension lump sum?
None on cash up to 25% of the pot, within the £268,275 Lump Sum Allowance shared across all your pensions. Cash above the 25% is taxed as income at your marginal rate.
How much of my retirement fund can I take as a lump sum?
Up to 25% tax-free. You can take more — even the whole pot — but anything over 25% is taxed as income. There's no requirement to buy an annuity with the rest.
What is the 4% drawdown rule for retirement?
The 4% rule suggests retirees withdraw 4% of their capital annually for sustainable income over 25–30 years. A £300,000 pot would give about £1,000 a month.
At what age can I take my pension?
There's no compulsory retirement age. Private and workplace pensions can usually be accessed from 55 (57 from 6 April 2028); State Pension age is 66, rising to 67 between 2026 and 2028.
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