You can leave money in your pension pot and take lump sums from it when you want to – until your money runs out or you choose another option. This is also known as ‘Uncrystallised Funds Pension Lump Sum’ (UFPLS).
What’s in this guide
How does taking your pension as a number of lump sums work?
You can take money from your pension pot as and when you need it until it runs out. It’s up to you how much you take and when you take it.
Each time you take a lump sum of money, 25% is usually tax-free. The rest is added to your other income and is taxable.
The remaining pension pot stays invested. This means the value of your pension pot and future withdrawals aren’t guaranteed.
Keeping your pension pot invested creates the potential for growth, but investments can go up or down.
The main advantage of this option is that you can spread the money you take over a number of tax years. This could help to reduce the overall amount of tax you pay.
Plus, the remaining pot stays invested in a tax-efficient environment – as growth on pension pots is tax-free.
Be aware that there might be charges each time you make a lump sum withdrawal. Also, there might be limits on how many withdrawals you can make each year.
Not all providers offer this option. If your current provider doesn’t offer it, you can transfer your pot to another provider. But you might have to pay a fee to transfer.
Find out more in our guide Transferring your defined contribution pension
Got questions about how your pension can be paid?
If you need help making sense of how and when you can access your pension pot, you can speak to someone from Pension Wise, a free service from MoneyHelper.
Things to think about
Taking out one or more lump sum won’t provide a regular retirement income for you or for any dependants after you die.
You need to plan how much money you can afford to take with this option. Otherwise, there’s a risk you’ll run out of money. This could happen if:
- you live longer than you’ve planned for – most people underestimate how long their retirement will be
- you take out too much in the early years
- your remaining investments don’t perform as well as you expect, and you don’t adjust the amount you take accordingly.
You’ll need to consider how to invest the money left in your pension pot. It’s important to regularly review your investments.
You might want to use a financial adviser to help you decide which funds to invest your pension pot in.
If you’re looking for products that offer simple ready-made investment options, you can use our Pension drawdown investment pathways comparison tool to help you shop around.
It’s important to understand what fees you might be charged, as they can deplete your pot. Charges vary between providers, and some policies include multiple charges.
When you take any money out of your pension pot, any growth in its value is taxable, unless you move it into another tax-efficient investment, whereas it will grow tax-free inside the pot. Drawdown is another way to take money from your pot. Find out more in our guide What is a flexible retirement income (pension drawdown).
Did you know?
Check if your pot has any special features that could mean you get a better deal, e.g. a guaranteed annuity rate.
If you haven’t taken all your tax-free cash by age 75, this part could be taxed if there’s unused tax-free cash in your pension pot when you die. See ‘What happens when you die’ below for more information.
Taking your pension in lump sums could reduce your entitlement to means-tested State benefits now or in the future. To find out how income or savings can affect benefits, see our guides Benefits in retirement and Beginner’s guide to paying for long-term care.
You can’t use this payment option if you have primary or enhanced protection, or if you’re entitled to a tax-free lump sum which is more than 25%.
Find out more in our guide How tax works on pension income
Shopping around
Check if your provider offers the option of taking lump sums.
Some providers will limit how much you can take out, and how often you can take money out.
Fees will also vary – some providers might charge a fee every time you take money out.
It’s important to shop around to make sure you get value for money and a product to suit your needs.
Comparing products yourself can be difficult. So you can get help from a regulated financial adviser. It’s the adviser’s job to recommend the product that’s most suited to your needs and circumstances.
If you’re looking for products that offer simple ready-made investment options, you can use our pension drawdown investment pathways comparison tool to help you shop around.
Tax you’ll pay
The rules for taking your pension as a number of lump sums mean three quarters (75%) of each lump sum taken counts as taxable income.
This is added to the rest of your income. Depending on how much your total income for the tax year is, you could find yourself pushed into a higher tax band.
So, if you take lots of large lump sums, or even a single lump sum, you could end up paying a higher rate of tax than you normally do.
If you spread the lump sum amounts over more than one tax year, you might pay less tax on them.
For example, your pot is £60,000. You take out £4,000 each year – £1,000 is tax-free and £3,000 is taxable. You work part-time and earn £12,070 a year. The total of your earnings and the taxable cash you’ve taken from your pot is £15,070. This is above the standard Personal Allowance of £12,570. So you pay £500 in tax. (£478.38 in Scotland).
Your provider will usually deduct emergency tax from the first lump sum payment. This means you might pay too much tax when you first start taking your money out and have to claim the money back. Or you might owe more tax if you have other sources of income.
Find out more about how to claim tax back in our guide How tax works on pension income
Extra tax charges or restrictions might apply if your pension withdrawals exceed the lump sum allowance (LSA). For most people, this limits the amount of tax-free cash you can withdraw to a total of £268,275.
Find out more in our guide Tax-free lump sum allowances for pensions
Continuing to pay in
As soon as you take a lump sum from your pot, this affects how much you can continue to save for retirement.
The Money Purchase Annual Allowance is £10,000.
If you want to carry on building up your pension pot, this option might not be suitable.
Find out more about the annual allowance and Money Purchase Annual Allowance in our guide How tax relief boosts your pension contributions
Means-tested benefits and debts
Taking money from your pension may affect your eligibility for means-tested state benefits.
Find out more on GOV.UK about how benefits can affect pensionsOpens in a new window
A business or person that you owe money to cannot normally make a claim against your pensions if you've not started taking money from them yet. This also applies to County Court Judgements and Individual Voluntary Arrangements. Once you have withdrawn money from your pension, however, you may be expected to pay.
If you need to clear debts, it’s important to get specialist help before accessing your pension.
Find out more in our guides:
What happens when you die?
If you die before the age of 75
Any money left in your pension pot will usually pass tax-free to your nominated beneficiary, subject to the lump sum and death benefit allowance rules This is the case if it’s paid within two years of the provider becoming aware of your death. If the two-year limit is missed, it will be added to your beneficiary’s other income and taxed in the usual way.
If you die after the age of 75
Any money left in your pension pot that you pass on – either as a lump sum or income – will be added to your beneficiary’s other income and taxed in the normal way.
Inheritance Tax
Any money you’ve drawn from your pension pot and not spent will count as part of your estate for Inheritance Tax purposes.
At the moment, death benefits and unused pensions are not included as part of your estate for calculating Inheritance Tax. A change announced in the Autumn 2024 Budget means that these could be liable for Inheritance Tax from April 2027.
The Lump Sum and Death Benefit Allowance (LSDBA)
Tax charges might apply if the value of all tax-free lump sums taken during your lifetime, plus any lump sum pension benefits that become payable on death, exceed the LSDBA (£1,073,100 for most).
Find out more in our guide Tax-free lump sum allowances for pensions
Your other retirement income options
Taking lump sums is just one options for using your pension pot to provide a retirement income.
Because of the risk of running out of money, it’s important to think carefully before using this method to fund your retirement income.
Scams
Beware of pension scams where they contact you unexpectedly about an investment or business opportunity that you haven’t spoken to them about before. You could lose all your money and face tax of up to 55% and extra fees.
Find out more in our guide How to spot a pension scam
Can you continue contributing to a pension if you take lump sums?
If you’re planning to take your tax-free lump sum and make further contributions into a pension, you need to be aware of the Money Purchase Annual Allowance. This limits the amount of contributions to a defined contribution pension pot that get tax relief to £10,000.
Find out more in our guide The money purchase annual allowance (MPAA) for pension savings
If you’re thinking about reinvesting your tax-free lump sum into a pension, consider speaking to a financial adviser first. This is because you could be affected by the pension recycling rules.
They can help you look at whether putting the money back into a pension is the best option for you and help avoid any pitfalls.
Find out more about pension recycling from HMRCOpens in a new window
