Maximising Your 25% Tax-Free Lump Sum: Options, Considerations, and Expert Advice
By Boring Money
22 April, 2025
You’ve finally shaken off the corporate shackles and it's time to use those carefully nurtured pension savings to support you for the rest of your life. No pressure! One of the perks of retirement is that you can take 25% of your pension fund tax-free. However, there are some important considerations before you start drawing down from your pot.
What is the 25% tax-free lump sum?
The main aim of a pension is to create an income stream when you are no longer earning a salary, but the government also allows you to take 25% of your pension pot as a tax-free lump sum, up to a maximum of £268,275.[1]
At the moment, you can do this from the age of 55 onwards, though this is rising to 57 from April 2028. There are circumstances whereby individuals can withdraw even more, but the rules are complex and typically require professional financial advice.
Lump sum withdrawal options
Take it all at once
You can take the whole 25% lump sum in one go and leave the rest invested until you need an income. This can be a useful approach if you are planning a phased retirement and need some cash for a few years to tide you over, or if you are planning some major expenditure.
Take less than the full allowance
You don’t have to take it all in one go. Remember that any money that stays in your pension fund will remain invested and continue to grow, so it can be worth leaving it in place if you don’t need it immediately. You may end up with a larger amount later on because stock markets tend to grow faster than cash over time.
Cash vs stock market returns, 2015-2025
Source: FE FundInfo, correct as at April 2025.
Take more than the full allowance
You can take out more than 25%, but you will need to pay tax on it at your marginal rate (i.e. at the same rates you would if it was your salary). If you don’t have a lot of other income, this can be worth doing, but you need to factor it into your calculations.
If you're a higher rate taxpayer this year, for example, and you might fall to being a basic rate taxpayer in the future, you need to time when you take any income with care to prevent yourself bumping back up into the higher tax bracket.
Income Tax bands explained
Income Tax Band | Taxable Income | Income Tax Rate |
Personal Allowance | Up to £12,570 | 0% |
Basic Rate | £12,571 to £50,270 | 20% |
Higher Rate | £50,271 to £125,140 | 40% |
Additional Rate | Over £125,140 | 45% |
Correct as at 2025-26 tax year.
Three things to consider before taking your lump sum
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