The pension tax-free lump sum: a quarter of the pot, and where the cash goes next

A quarter, up to the lump sum allowance

The rule in GOV.UK's guide to tax on a pension is simple to state. Up to 25 % of a pot can usually be taken without income tax, normally from 55. The remainder is taxable income when it comes out, whether as drawdown, an annuity or a further lump sum. The ceiling on tax-free cash is the lump sum allowance, £268,275 for most people according to the Budget 2025 rates and allowances. It is a lifetime total across every pension, not a figure per pot.

For most savers the cap is academic. A quarter of a pot only exceeds the allowance once the pot is above £1,073,100. On a £1,500,000 pot, for instance, a quarter would be £375,000, but the engine limits the tax-free part to £268,275; the rest of the quarter would be taxed as income. People with older protections may have a higher personal figure, which the scheme confirms.

GOV.UK's £60,000 example

GOV.UK illustrates the split with a pot of £60,000 taken in full. A quarter, £15,000, is tax free; income tax is due on the other £45,000. How much depends on the rest of the person's income that year. With £20,000 of other income in England, Wales or Northern Ireland, the engine puts the extra tax at £11,946, leaving £48,054 in hand, because a taxable £45,000 on top of a modest income runs well into the higher rate. Spreading the taxable part over several tax years usually costs less, which the page on cashing in a pension works through. In Scotland, where income tax has its own bands, the same withdrawal on the same other income costs £13,836, so the tax-free quarter is worth the same everywhere but the taxable part is not.

Small pots, trivial commutation and serious ill health

A few routes work differently. Small pots of up to £10,000 can be taken in one go, up to 3 of them from personal pensions and without a limit on the number from workplace schemes; a quarter is tax free and the rest is taxed as income. Where all of a person's pensions add up to £30,000 or less, trivial commutation lets them take the lot as a lump sum, a route often used with small defined benefit pensions. And for someone under 75 who is not expected to live more than a year, GOV.UK says the whole pot can usually be paid tax free, within the lump sum and death benefit allowance of £1,073,100. In each case the cash that comes out is the person's money from then on, which is what matters for the rest of this page.

Taking the cash does not take it out of the estate

A frequent assumption is that drawing the tax-free lump sum puts money beyond the reach of inheritance tax. If anything, the opposite was true. Before 6 April 2027 a pension paid at the scheme's discretion was usually outside the estate, so moving cash out of it into a bank account brought that money into the estate. From that date, under section 66 of the Finance Act 2026, the pot itself counts. Either way, cash in an account counts in full. Only what is spent or given away, subject to the gift rules, leaves the estate.

What the lump sum does change is the income tax heirs pay. GOV.UK's page on inherited pensions sets out the age rule: when the member dies under 75, most lump sums and drawdown paid to beneficiaries are free of income tax within the member's allowance; when the member dies at 75 or over, everything the heirs draw is taxed as their income. Cash already taken tax free during life has no such second charge.

The same pot left whole or with a quarter taken and saved

The engine compares one estate in two versions: a single parent with a £350,000 home left to two children, £100,000 of savings and a £400,000 pension. In one version the pension is never touched. In the other, the parent takes £100,000 tax free and keeps it on deposit. Each child earns £45,000 and draws an inherited pension over four tax years. Growth, charges and spending are ignored, so the only difference is where the money sits.

The inheritance tax line is identical in both tables: the estate is the same size whichever pocket the money is in. At 70 the children's income tax is also the same, nil, because lump sums from a member who died under 75 are tax free within the allowance, and the £100,000 taken in life still leaves plenty of it. At 80 the picture moves. The untouched pot is taxed as the children's income after the inheritance tax borne on it, and the £100,000 that was taken earlier is not, so the children keep £33,412 more between them.

The size of that gap depends on the children's own tax position as much as on the parent's choice. Run again with each child having only £5,000 of other income instead of £45,000, the engine finds a difference of £16,706: the inherited pension then falls mostly in the basic rate band, so there is less income tax to avoid. A child already earning well, by contrast, pays the higher rate on almost every pound drawn. Heirs who draw the pension over more years narrow it further, for the same reason. The comparison is therefore a measure of one family's tax rates, not a general rule about lump sums.

What the comparison leaves out

The difference at 80 is real but it is not the whole story, and the site does not recommend taking a lump sum for it. Money left invested in a pension and cash on deposit will not grow at the same rate, and the engine assumes neither grows. Cash can be spent, which is a benefit for the member and a cost to the estate. A lump sum taken before 75 reduces what remains of the lump sum and death benefit allowance for the heirs, which matters only for large pots. And the member does not know at what age they will die, which is the one input that decides the outcome. The guide to pensions after 75 explains the combined tax on an inherited pot; the pension or ISA page compares where savings sit. A regulated financial adviser is the person who checks a decision about a real pension.