What tax-free cash means for your pension

Thinking about taking money from your pension? Here’s what tax-free cash means, when you can access it, and what to consider first.

Most money you take from a pension is treated as taxable income. However, many people can take up to 25% of their pension tax-free.

When and how you choose to take this tax-free amount can affect your future income, so it’s important to understand the rules before making any decisions. 

What is tax-free cash?

While most pension income is taxable, you can usually take 25% of it in cash without paying taxes on that amount.

So, for example, if you had £200,000 in your pension, you could take £50,000 as a tax-free amount. 
This only applies if:

•    You have a personal or workplace pension
These rules don’t apply to the State Pension.

•    You have a defined contribution pension
Defined benefit pensions have different conditions.

•    You have less than £1,073,100 in your pension 
If it's worth more than this, different limits can apply to the amount of tax-free cash you can take. You may want to get financial advice if you think this could affect you.

When can you take your tax-free allowance?

Usually, the earliest you can start accessing your workplace or personal pension – including the 25% tax-free amount – is when you reach the normal minimum pension age (NMPA). Currently, that’s 55, but it’s rising to 57 on 6 April 2028. 

You may be entitled to access your pension sooner if your scheme offers a lower protected pension age, or if you need to retire early due to poor health, like a disability or terminal illness.

However, keep in mind that most pensions are designed to be taken from a normal pension age set by your provider. This age varies, but it’s often State Pension age (currently age 66 - 68, depending on when you were born) or slightly earlier. 

It’s important to note that taking your pension early could affect its final value. Plus, the way you take your tax-free cash could have further tax implications later down the line.

Do you have to take the tax-free amount all at once?

No, you don’t have to take the full tax-free amount in one go if you don’t want to. 
Some people choose to access their tax-free amount in stages, often alongside their regular pension income.

In this case, 25% of the amount you withdraw is usually tax-free, while the remaining 75% is subject to income tax. 

For example, you might withdraw £2,000. Of that amount, £500 would be tax-free, and £1,500 would be taxable. 

Once the tax-free allocation has been used up, all of your remaining pension income is subject to tax.

There are different ways to access your pension, including:
•    Flexi-access drawdown – where you move your pension into a drawdown account, keep it invested, and take money out when you need it.
•    Uncrystallised Funds Pension Lump Sum (UFPLS) – where you take lump sums directly from your pension pot without first moving it into a drawdown account.

Each option can affect how much tax you pay, so it's important to consider your choices carefully before deciding what's right for you

What to consider before taking your tax-free entitlement

Before deciding whether to start accessing your tax-free cash, you should think about the following. 

Effect on future retirement income

Taking tax-free cash means there will be less money left in your pension. This could reduce the amount of income available to you later in retirement.

If some or all of your remaining pension stays invested, it may also have less opportunity to benefit from any future investment growth. But the effect will depend on how you choose to access the rest of your pension and your personal circumstances. You should also remember that the value of pension investments can go down as well as up. 

Before taking any money from your pension, it's worth considering how it could affect your future retirement plans.

Potential tax on the remaining pension

The remaining 75% of your pension is taxed as income. The amount of taxable income you receive in a given year determines the amount of income tax you have to pay. 

Accessing a higher amount could place you in a higher tax bracket, so it’s important to consider this before withdrawing money from your pension.

The current rate of income tax is:
•    0% on annual income up to £12,570
•    20% on annual income between £12,571 and £50,270
•    40% on annual income between £50,271 and £125,140
•    45% on annual income over £125,140
 

Income tax bands are different in Scotland. View the current rates.

You should also note that taking taxable income from a defined contribution pension can trigger the money purchase annual allowance (MPAA).

Common misconceptions about the tax-free allowance

“All pension withdrawals are tax-free”

This isn’t true – most defined contribution pensions come with a 25% tax-free allowance, while the remaining 75% is taxable. 

“Taking it early has no impact”

Taking tax-free cash earlier than you need it could reduce the amount available to provide income later in retirement. Once withdrawn, that money is no longer invested within your pension and could miss out on any future investment growth. This could mean your pension savings are worth less in the future than if the money had remained invested. 

“You have to take it all at once”

You don’t have to take your tax-free lump sum in one go. You can opt to take it gradually instead, but the way you do this will impact the amount of income you receive, and therefore the amount of tax you need to pay. 

It’s important to understand the implications before accessing any of your pension. 

What should I do next?

If you're thinking about taking tax-free cash from your pension, it's worth understanding how this could affect your future retirement income. Check your pension value, explore your retirement income options and consider how much income you might need in retirement before making any decisions.

If you're unsure, consider seeking guidance or financial advice.

If you’re a Standard Life customer, you can check your pension online or via the app. There you’ll also find handy tools which can help you. Or, check our support page for FAQs and ways to get in touch.

The information here is based on our understanding in August 2026 and shouldn’t be taken as financial advice.

A pension plan is an investment. Its value can go down as well as up and could be worth less than was paid in.

Your own personal circumstances, including where you live in the UK, will have an impact on the tax you pay. Laws and tax rules may change in the future.

Standard Life accepts no responsibility for information on external websites. These are provided for general information.