Maximise Tax-Free Cash From Your Pension – 5 Key Things To Consider

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Having saved into a pension, or pensions, there will be a time when you may consider accessing the tax-free cash available from your pension.


The maximum tax-free cash sum is typically 25% of the accumulated value and most pensions allow the tax-free cash sum to be taken from age 55, however you should note that this increases to age 57 in 2028.

It is very likely the lump sum from your pension will represent a considerable amount of money and it is very tempting to withdraw the maximum amount as early as possible at age 55. It may well be beneficial for you if you intend to use to pay off debt such as your mortgage. But there’s more to consider before deciding on what’s right for you. Here are the five key things you need to consider first.

What to consider when accessing tax-free cash from your pension

1. Income throughout retirement

The purpose of a pension is to provide a continued income throughout your retirement, effectively a salary. Taking a lump sum out of your pension ahead of retiring will ultimately reduce the value of your pension fund and income available when you retire.

Hopefully you will have 20 to 30 years ahead of you at the age of 55 and this is a long period of time to make a pension fund last. Careful consideration should therefore be given as to whether age 55 is the right time to withdraw the tax-free cash capital, especially if you continue to work.

2. Preserving capital

It is naturally very tempting to access your tax-free cash sum at the earliest opportunity after many years of carefully saving into your pension and, as mentioned previously, it may be beneficial in certain circumstances.

You should tread carefully, however, as you are sure to have plans for retirement that will require capital. Taking a cash sum at the age of 55 will help in the short-term, but once spent, there is no further capital available for the future and you will effectively need to save retirement income to build up a new capital value. For some this may be easy, but for others this may present a challenge and have a negative impact on your spending ability during retirement.

3. Pension Lifetime Allowance

The Lifetime Allowance (LTA) is a limit on the total value of pension benefits you can accumulate throughout your life without incurring a tax charge. The limit has been set at £1,073,100 until April 2026.

When accessing your tax-free cash, this is known as a benefit crystallisation event and your pension will be tested against the LTA if your total benefits exceed the threshold, an unwelcome tax charge could be created.

This is a complex area of pension legislation, and we suggest you seek professional advice if relevant.

For expert advice on financial matters why not book a call with a Financial Adviser from Integrity365. Email Integrity365 directly for more information.

4. Care taking taxable income in addition to a tax-free cash sum

There are limits on how much we can contribute into our pension in order to receive tax relief (known as the Annual Allowance). The limits are typically 100% of taxable income up to a maximum of £40,000 per annum.

When taking your tax-free cash only, this has no impact on the Annual Allowance and your ability to continue to fund a pension. However, if you elect to take a taxable income in addition, there are circumstances whereby a reduced allowance of £4,000 per annum will be applied and this is known as the Money Purchase Annual Allowance (MPAA).

This may have an impact on your ability to continue to fund a pension and could impact any employer contributions you receive from membership of a workplace pension scheme.

5. Multiple pension arrangements

It is not uncommon to accumulate multiple pension pots throughout your working life, and consideration should be given as to whether you wish to consolidate into a single arrangement before accessing tax-free cash.

Consolidating pensions will often ease your administration and make it easier to manage on an ongoing basis. Care should be taken when transferring pensions as it is important you are not losing any valuable guarantees or benefits so advice should be considered where appropriate.

Written by Craig Pritchard Dip PFS, Senior Corporate IFA Consultant, Integrity365

Customer service is at the heart of everything Integrity365 do, from the early days of pensions and ISAs to investments and lump sum decisions, through to retirement and later life planning, they are here to support you through the key stages of your life with a holistic approach to financial planning.

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