How does the 25% tax-free lump sum work?
02 October 2025
Question by Peter
A few questions:
1) Do you have to take all your 25% tax-free withdrawal in one go, or can you split it over multiple withdrawals, over multiple years?
2) If over multiple years, how is the figure calculated of which you can take 25% tax-free? I mean if I had £200,000 in say 2030 and took out £10,000, and then in 2031 my pension (e.g. SIPP) had risen to £210,000 - how much then can I withdraw tax-free? And what if I took another £10,000 in 2031 and then in 2033 my pension fund now has £150,000 (maybe the AI bubble popped) - how much more can I withdraw tax-free?
3) Even if it wasn't over multiple years, how and at what point in time is the value of the pension determined of which you can take 25% tax-free?
4) If you have several pension pots, can you take 25% tax-free of the total amount out of just one of those pots, or are you limited to 25% from each individual pot? For example, if I had an old workplace pension of £100,000, another of £50,000, and a SIPP of £150,000, could I take £75,000 tax-free out of my SIPP, or do I have to take £25,000, £12,500, and £37,500 out of these pots respectively?
Answered by Lee Wells
Hi Peter,
Answers to your questions below:
You currently (unless legislation changes) have an allowance of 25% that you can withdraw across your personal pensions of 25% of the fund value. You do not have to take this in one go. You can withdraw up to the 25% of your pension fund value at any point.
This often trips people up. Every time you want a tax-free lump sum, you must crystallise 4× that amount. You take 25% tax-free, and the remaining 75% is kept aside (taxable later). The tax-free allowance is always based on what’s still uncrystallised at the point you take it, regardless of market rises or falls.
The amount of your 25% withdrawal is calculated on the value of your fund on the day of withdrawal.
Each pension will be assessed individually by the respective scheme administrator, so you would need to take 25% from each pension rather than cumulatively from one pension.
Hope this is helpful!
Answered by
Lee Wells
Managing Partner - Financial Planner
When Lee got his first job in the 90’s his father said ‘you should go to see my financial adviser’ (he didn’t’ know he had one). Lee dutifully went to see him and was converted by the common sense advice he was given on saving and investing for his future. He liked it so much he joined the company so he could help other people learn how to invest. Lee now runs a company passionate about providing value for money advice on a whole range of areas.