Pension Tax Free Lump Sum Calculator

You can take 25% of your pension pot as a tax-free lump sum from age 55 (rising to 57 from April 2028). On a £200,000 pot that is £50,000 tax-free; on £400,000 it is £100,000; on £1,000,000 it is £250,000. The cap is the Lump Sum Allowance of £268,275, which means anyone with a pot above roughly £1,073,000 hits the cap and the excess 25% becomes taxable.

The tax-free lump sum is one of the largest single tax breaks in the UK system. £50,000 of tax-free cash is equivalent to roughly £83,000 of gross salary for a higher-rate taxpayer (after 40% tax and 2% NI). Many retirees use it to clear remaining mortgage debt, fund the early bridge years before State Pension kicks in, or front-load discretionary spending in the active early years of retirement when health is best.

You do not have to take the full 25% in one go. Under flexi-access drawdown, every withdrawal you make from your pension is split 25/75: 25% tax-free, 75% taxed as income. Withdrawing £40,000 a year therefore gives you £10,000 tax-free and £30,000 taxable, year after year, until either the 25% allowance is exhausted or the LSA cap is reached. This phased approach is normally more tax-efficient than taking the maximum lump sum on day one, because it stretches the tax-free element across multiple years and reduces the temptation to spend the lump sum quickly.

Taking the full 25% at age 55 also triggers some pension wrapper changes worth understanding. Once you have taken any taxable income from a flexi-access drawdown pot, the Money Purchase Annual Allowance kicks in, capping your future contributions at £10,000 a year (down from the standard £60,000). For anyone still working and contributing, that is a meaningful constraint. Taking only the tax-free lump sum without taking any taxable income avoids this trigger. The [can I retire early calculator](/can-i-retire-early) is useful for modelling whether the lump sum changes your retirement-readiness numbers materially.

The single most popular use is clearing the remaining mortgage. With UK mortgage rates around 4.5% to 6% in 2026 and savings rates around 4.5% before tax, paying off a mortgage with the lump sum often produces a guaranteed risk-free return higher than any savings or investment alternative. The exception is if your mortgage is on a sub-3% legacy fix; in that case keeping the cash invested in an ISA or general investment account at expected 5%+ real returns probably wins. The second most popular use is rebuilding the lump sum into a Stocks and Shares ISA over several tax years, effectively moving capital from the pension wrapper (where future drawdowns are taxed) to the ISA wrapper (where future drawdowns are not). At £20,000 a year of ISA allowance per person, a couple can move £40,000 a year of pension lump sum into ISA over three to four years.