Pension 25% Tax-Free Lump Sum (2026/27): £268,275 PCLS Cap

Q How much of my pension can I take tax-free in 2026/27?

Usually 25% of the defined contribution (DC) pension you crystallise, as a pension commencement lump sum (PCLS), up to a lifetime total of £268,275 - the Lump Sum Allowance (LSA), which replaced the Lifetime Allowance on 6 April 2024 (Finance Act 2024). On pensions worth more than £1,073,100 in total (4 × £268,275) the LSA, not 25%, sets the limit unless you hold a protection. The lump sum is not taxable income, so it does not use your Personal Allowance or push you into a higher band. What you draw from the rest is taxed as income.

Q What was the Lifetime Allowance and when was it abolished?

The Lifetime Allowance (LTA) was a limit on the pension benefits you could build up before a tax charge: 55% on excess taken as a lump sum, 25% otherwise. The charge stopped applying from 6 April 2023 (Finance (No. 2) Act 2023) and the allowance itself was abolished from 6 April 2024 (Finance Act 2024 s.14 and Schedule 9). The last LTA figure was £1,073,100. It was replaced by the Lump Sum Allowance (£268,275) on tax-free lump sums in your lifetime and the Lump Sum and Death Benefit Allowance (£1,073,100), which also covers certain lump sums paid on death. People with an existing LTA protection may have higher allowances.

Q How does the £268,275 Lump Sum Allowance work?

Every tax-free lump sum you take counts against it, across all your pensions. Once it is used up, any further lump sum is taxed as income. Example: from a £400,000 pot you take £100,000 tax-free, leaving £168,275 of the allowance. From a £600,000 pot you take £150,000, leaving £18,275. From a third £400,000 pot only £18,275 can then be tax-free, not £100,000. Ask each provider how much of your allowances you have used and add the totals across all your schemes (gov.uk).

Q What is the Lump Sum and Death Benefit Allowance (LSDBA)?

The LSDBA of £1,073,100 limits the tax-free lump sums paid to you and certain lump sum death benefits paid to your beneficiaries. Anything that counts towards the LSA also counts towards the LSDBA, as do serious ill-health lump sums and some death benefits. Lump sums above it are taxed as income of the person who receives them. Each person has their own allowance; it cannot be transferred to a spouse.

Q What is the minimum age to access pension lump sums?

Usually 55, the normal minimum pension age, rising to 57 from 6 April 2028 (Finance Act 2022 s.10). The rise does not apply to members of uniformed services schemes, and some members keep a protected pension age, for example under rights that existed before 4 November 2021 or under a scheme joined before 6 April 2006. Earlier access is also possible if you retire because of ill health. If you are expected to live less than a year, are under 75 and your pot is within your LSDBA, you may be able to take it all tax-free. Money taken early without one of these reasons is usually an unauthorised payment, taxed at up to 55% (a 40% charge plus a 15% surcharge, Finance Act 2004 ss.208-209).

Q UFPLS vs full PCLS - which is better?

PCLS with drawdown: you crystallise part or all of the pot, take up to 25% of it tax-free and move the rest into drawdown (or buy an annuity). UFPLS: each withdrawal from the uncrystallised pot is 25% tax-free and 75% taxable. The tax-free share is the same; what differs is timing. Both leave the untouched money invested inside the pension. MPAA: a UFPLS always triggers the £10,000 Money Purchase Annual Allowance. Taking only the PCLS does not; taking any taxable income from drawdown does. After that, DC contributions above £10,000 a year (instead of the £60,000 annual allowance) trigger a tax charge, which matters if you are still working.

Q What is the recycling anti-avoidance rule?

The recycling rule (Finance Act 2004 Sch 29 para 3A; HMRC PTM133810) stops a tax-free lump sum being used to pay significantly more into a pension for fresh tax relief. It applies only if all of these are met: you take a PCLS; because of it, contributions (by you or anyone else) are significantly greater than they would otherwise have been; the recycling was pre-planned; the lump sum, with any others in the previous 12 months, exceeds £7,500; and the extra contributions add up to more than 30% of the lump sum. Contributions are measured over the tax year of the lump sum and the two years before and after (PTM133830). If it applies, the lump sum is treated as an unauthorised payment. HMRC says very few lump sums are affected and normal retirement planning is not caught.

Q How is the 75% remainder taxed?

As pension income, at the same Income Tax rates as earnings, added to your other income for the year (Income Tax (Earnings and Pensions) Act 2003 s.579A). If your only other income is a full new State Pension (£12,547.60 in 2026/27), just £22.40 of Personal Allowance is left, so almost all drawdown is taxed. Example at 2026/27 rates (England, Wales or Northern Ireland): the taxable £375,000 of a £500,000 pot taken in one tax year costs £154,953 in Income Tax, because it loses the Personal Allowance and runs into the higher and additional rates. Taken as £18,750 a year for 20 years on top of a full State Pension, it costs £74,910 in total - assuming no investment growth and today's thresholds throughout.

Q What changes with pensions and Inheritance Tax in April 2027?

For deaths on or after 6 April 2027, most unused pension funds and death benefits are included in the estate for Inheritance Tax (Finance Act 2026 ss.66-71). Excluded are dependants' scheme pensions, dependants' or nominees' annuities bought together with your lifetime annuity, and death-in-service benefits. Benefits left to a spouse, civil partner or charity stay exempt. Example: a widowed person with £900,000 of other assets, including a home left to their children, a £400,000 unused pension and their late spouse's unused allowances, has £1,000,000 of nil-rate and residence nil-rate bands. Before the change the estate is £900,000 and the tax is £0; after it the estate is £1,300,000 and the tax is £120,000. See our pension IHT calculator.

Q What about DB (Defined Benefit) pension lump sums?

Defined benefit schemes usually let you give up ("commute") part of your pension for a tax-free lump sum. The scheme sets the commutation factor - the lump sum you get for each £1 a year of pension given up. The maximum tax-free amount is set by the PCLS rules in Finance Act 2004 Schedule 29 (HMRC PTM063220) and also counts towards your Lump Sum Allowance. The choice is made when the pension starts and cannot normally be changed later. Whether commuting is worth it depends on the factor, how the pension is increased each year and how long you live, so check your scheme's figures before deciding.

Q Can I gift my pension lump sum to my children?

Yes - once paid, the tax-free lump sum is your money. A gift to a person is a potentially exempt transfer (Inheritance Tax Act 1984 s.3A): it leaves your estate if you survive 7 years. If you die within 7 years it is added back, and if the gifts exceed the nil-rate band, taper relief reduces the tax on the excess where you survive more than 3 years. £3,000 a year of gifts is exempt (s.19), and regular gifts out of surplus income can be exempt straight away (s.21). Beware the recycling rule if any of the money goes back into a pension.

Q Do Scottish residents pay different tax on pension drawdown?

Yes. If you are a Scottish taxpayer, the taxable part of your drawdown is taxed at Scottish rates: for 2026/27, 19% Starter rate / 20% Scottish basic rate / 21% Intermediate rate / 42% Higher rate / 45% Advanced rate / 48% Top rate. With the standard Personal Allowance, the Scottish 42% higher rate starts at £43,662 of income, against £50,270 for the UK 40% rate, and the 45% advanced rate starts at £75,000, where the rest of the UK is still at 40%. The tax-free lump sum is tax-free everywhere in the UK. Your provider deducts the tax through PAYE using your tax code; an S prefix means Scottish rates.