Pension Commencement Lump Sum (25% Tax-Free Cash) Guide 2026/27
Most people can take up to 25% of their pension pot as a tax-free lump sum when they start accessing it -- known formally as the Pension Commencement Lump Sum (PCLS). Since the lifetime allowance was abolished, this tax-free cash entitlement is now capped by a separate Lump Sum Allowance rather than a single overall pot limit. This guide explains how much tax-free cash you can take in 2026/27, how it interacts with drawdown and annuities, and what happens if you have historic lifetime allowance protection.
What the Pension Commencement Lump Sum Is
When you first start taking money from a defined contribution pension, you can normally take up to 25% of the value you access completely tax-free -- this is the Pension Commencement Lump Sum, often just called your "25% tax-free cash" or "tax-free lump sum." The remaining 75% is then either left invested in drawdown, used to buy an annuity, or taken as taxable income, depending on how you choose to access it.
You do not have to take your tax-free cash all at once or as soon as you become eligible (from age 55, rising to 57 from April 2028) -- many people take it in stages as they draw down their pension gradually.
The £268,275 Lump Sum Allowance
Since the lifetime allowance was abolished, the amount of tax-free cash you can take across all your pensions in your lifetime is capped by the Lump Sum Allowance (LSA), set at £268,275 for 2026/27 -- broadly equivalent to 25% of the old £1,073,100 lifetime allowance, frozen at that level.
A separate, higher limit, the Lump Sum and Death Benefit Allowance (LSDBA) of £1,073,100, caps the total tax-free amount you can take across lump sums during your life plus certain lump sum death benefits paid to your estate or beneficiaries if you die, typically before age 75.
Taking Tax-Free Cash with Drawdown vs an Annuity
How you take your tax-free cash depends on what you do with the rest of the pot:
Flexi-access drawdown: you can crystallise part of your pot, take 25% of that portion tax-free, and leave the remaining 75% invested to draw a taxable income from as needed.
Annuity purchase: you take 25% of the amount you are annuitising as a tax-free lump sum, then use the remaining 75% to buy a guaranteed taxable income for life or a set term.
Uncrystallised Funds Pension Lump Sum (UFPLS): each withdrawal you make is automatically 25% tax-free and 75% taxable, rather than taking a single upfront lump sum, useful for smaller, irregular withdrawals.
Protected Allowances from the Old Lifetime Allowance
People who held certain protections against the old lifetime allowance -- such as Fixed Protection, Individual Protection, or older primary/enhanced protections -- may have a higher personal Lump Sum Allowance than the standard £268,275, reflecting their protected lifetime allowance figure at 25%.
If you believe you hold historic protection, it is essential to have your pension provider or a regulated adviser confirm your specific protected amount before taking tax-free cash, since using the wrong figure can either understate what you are entitled to or trigger an unexpected tax charge.
Frequently Asked Questions
How much tax-free cash can I take from my pension?
Most people can take up to 25% of the amount they access from a defined contribution pension tax-free, subject to an overall lifetime cap called the Lump Sum Allowance, which is £268,275 for 2026/27 unless you hold a protected higher allowance from the old lifetime allowance regime.
What is the Lump Sum Allowance?
The Lump Sum Allowance (LSA) is the total amount of tax-free lump sum cash you can take across all your pensions over your lifetime, set at £268,275 for 2026/27. It replaced the old lifetime allowance system, under which tax-free cash was simply 25% of a single overall pension value cap.
What happens if I take more tax-free cash than my Lump Sum Allowance?
Any tax-free lump sum taken above your available Lump Sum Allowance is taxed as pension income at your marginal rate, rather than being tax-free. Pension providers track how much of your allowance you have used across different schemes, so it is important to tell each provider about lump sums already taken elsewhere.
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Do I have to take my tax-free cash as soon as I access my pension?
No. You can access your pension gradually -- crystallising portions over time through drawdown or UFPLS withdrawals -- taking 25% of each portion tax-free as you go, rather than taking all your available tax-free cash in one go at the start.
What is the Lump Sum and Death Benefit Allowance?
The LSDBA, set at £1,073,100 for 2026/27, is a separate, wider cap covering the total tax-free amount across lump sums taken during your lifetime plus certain lump sum death benefits paid out (typically if you die before age 75). It sits alongside, and is generally larger than, the £268,275 Lump Sum Allowance that applies to lifetime tax-free cash alone.
Can I take tax-free cash without buying an annuity or entering drawdown?
Not usually as a completely standalone lump sum with no other action -- taking your Pension Commencement Lump Sum normally happens at the point you crystallise pension funds, which means simultaneously moving the remaining 75% into drawdown, using it to buy an annuity, or (for smaller pots) taking a small pot lump sum where different rules apply.
Do I pay tax on the 75% left after taking tax-free cash?
The remaining 75% is not taxed immediately just by crystallising it, but any income or lump sums you subsequently draw from it -- whether as drawdown income, annuity payments, or further withdrawals -- are taxed as income at your marginal Income Tax rate in the year you receive them.
What is Fixed Protection or Individual Protection and how does it affect tax-free cash?
These are historic protections some people registered for before the lifetime allowance changes, allowing them to keep a higher personal lifetime allowance figure (and therefore a higher personal Lump Sum Allowance, calculated as 25% of their protected amount) than the current standard limits. If you registered for one of these protections, your available tax-free cash could be significantly higher than £268,275 -- check your specific protection certificate or ask your provider.
Is my State Pension included in the Lump Sum Allowance?
No, the State Pension is paid as income and is entirely separate from the Lump Sum Allowance, which only applies to tax-free lump sums taken from private and workplace defined contribution or defined benefit pension arrangements.
Disclaimer: This guide reflects Pension Commencement Lump Sum and Lump Sum Allowance rules as they apply in 2026/27. Individual protections from the pre-2024 lifetime allowance regime can significantly change your position -- get regulated financial advice before taking large pension withdrawals. This guide is for general information only and is not professional advice. Consult a qualified adviser and refer to gov.uk for current official guidance before relying on any treatment.