The Lump Sum Allowance Explained 2026/27: Your £268,275 Tax-Free Cap
Since the lifetime allowance was abolished, a new limit governs how much tax-free cash you can take from your pensions. The Lump Sum Allowance is £268,275 in 2026/27. Here is what it covers, who it affects, and how it interacts with the standard 25% tax-free cash.
A New Limit After the Lifetime Allowance
For years, the lifetime allowance set a ceiling on how much you could build up in pensions before extra tax charges applied. It was abolished from April 2024 and replaced by a set of new allowances that focus specifically on lump sums. The most important of these for everyday savers is the Lump Sum Allowance, or LSA.
In 2026/27 the Lump Sum Allowance is £268,275. This is the most tax-free cash you can take from all your pensions across your lifetime. The figure is exactly 25% of the old £1,073,100 lifetime allowance, which is why it looks like such an unusual number.
The important change is this: you can now accumulate a pension pot of any size without a lifetime allowance charge, but the tax-free portion of what you eventually withdraw is still capped.
How the Lump Sum Allowance Works
When you start taking benefits from a defined contribution pension, you can usually take up to 25% of the pot as a tax-free lump sum. Each time you do, the amount of tax-free cash counts against your £268,275 Lump Sum Allowance.
You can take tax-free cash from several pensions, or in several stages, and each tranche reduces the remaining allowance. Once the running total reaches £268,275, any further lump sums you take are no longer tax-free. They are taxed as income at your marginal rate, even if they would otherwise have been within the 25% limit of a particular pot.
A simple illustration
| Withdrawal event | Tax-free cash taken | LSA used to date | LSA remaining |
|---|---|---|---|
| Pension A, 25% of £400,000 | £100,000 | £100,000 | £168,275 |
| Pension B, 25% of £500,000 | £125,000 | £225,000 | £43,275 |
| Pension C, 25% of £300,000 | £43,275 (capped) | £268,275 | £0 |
In this example, the third pension would otherwise have allowed £75,000 of tax-free cash (25% of £300,000), but only £43,275 of allowance remains. The remaining £31,725 of that intended lump sum is taxed as income.
Who Actually Hits the Cap
For the great majority of savers, the Lump Sum Allowance is irrelevant in practice. To reach £268,275 of tax-free cash, your total pension savings would need to exceed roughly £1,073,100, because the tax-free element is 25% of the pot.
Most people retire with pots well below that level and take their tax-free cash comfortably within the cap. The allowance mainly affects:
- High earners who have contributed heavily over a long career.
- Long-serving members of generous defined benefit schemes.
- People with several substantial pots that add up to more than £1 million.
If you are anywhere near this territory, it pays to track every tax-free lump sum you take, because the cap is cumulative across your whole life and all your pensions.
The Lump Sum and Death Benefit Allowance
There is a second, larger allowance worth knowing about: the Lump Sum and Death Benefit Allowance (LSDBA). This is set at £1,073,100 in 2026/27 and covers tax-free lump sums taken in life plus certain tax-free lump sums paid out on death.
In practice, the LSA limits what you can take tax-free while alive, and the LSDBA limits the combined total of lifetime tax-free cash and tax-free death benefit lump sums. Both can come into play for people with very large pensions, and the interaction is technical, so specialist advice is sensible if you are close to either figure.
Protected Allowances
People who took out lifetime allowance protection in the past, such as Fixed Protection 2012, 2014, or 2016, or Individual Protection, may have a higher personal Lump Sum Allowance that reflects the protection they registered.
If you hold a valid protection certificate, your tax-free cash entitlement can exceed the standard £268,275, and in some cases your tax-free cash is calculated by reference to your protected figure rather than the standard one. These protections remain valuable after the abolition of the lifetime allowance, so do not assume they are obsolete. Locate your protection reference number and confirm your entitlement before taking benefits.
How This Affects Your Retirement Planning
The shift from the lifetime allowance to the Lump Sum Allowance changes the incentives for larger savers in a few ways:
- There is no longer a penalty for letting a large pot grow, because the lifetime allowance charge has gone. Keeping money invested can make more sense than before.
- Tax-free cash is the scarce resource now. If you may approach the £268,275 cap, plan carefully how and when you crystallise lump sums.
- For inheritance planning, pensions remain a tax-efficient way to pass on wealth in many cases, though the rules on inherited pensions have been changing, so confirm the current position.
- Taking tax-free cash early just because you can is not always wise. Money left inside the pension continues to grow free of income tax and capital gains tax.
Keeping Track
Because the Lump Sum Allowance is a lifetime figure spread across all your pensions, good record-keeping matters. Each time you crystallise benefits, your provider should give you a statement showing how much of your allowance you have used. Keep these statements together, because when you take your final tranche of tax-free cash, you will need to know how much allowance remains.
If you are likely to approach the cap, or you hold any form of protection, take regulated advice and confirm the current allowance figures on GOV.UK, since the amounts and the surrounding rules continue to evolve.
Frequently asked questions
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