Tax-free cash
Should I take my tax-free cash?
It is the most-asked question in this whole subject and the one with the most folklore attached. Here is what the rules actually say and what the arithmetic actually does.
It is the most-asked question in this whole subject and the one with the most folklore attached. Here is what the rules actually say and what the arithmetic actually does.
You can normally take 25% of a pension pot free of income tax. The proper name is a pension commencement lump sum; everybody calls it tax-free cash and so will we. It is capped — the lump sum allowance is £268,275, so the 25% only stops being 25% once your pensions pass roughly £1.07 million.
The earliest you can normally get at it is 55, and that becomes 57 on 6 April 2028. If you were born after 6 April 1973 you will be waiting until 57 whatever you were told ten years ago. A handful of older schemes carry a protected earlier age, which is a thing to check rather than a thing to assume.
“Use it or lose it at 55.” No. It sits there. “You have to take the whole 25%.” No — you can take part of it, or take it in slices over years. “Taking it means you've retired.” No. You can take tax-free cash and carry on working exactly as before.
There isn't a right answer to “should I take it”, and anyone who gives you one without seeing your numbers is guessing. But there is a right question, and it is not the one most people ask.
People ask “can I take it?” The useful question is “what is it for, and what does taking it do to the age my money runs out?” Those two have answers. And in our experience the moment somebody has to finish the sentence “I want the tax-free cash because…”, about half of them stop, because the honest ending is “because it's there and it's free”.
Free it is not. It is your own money, and taking it early has a price that shows up thirty years later rather than this month.
The pot is 25% tax-free at whatever size it happens to be. Take £105,000 out of £420,000 today and the remaining £315,000 grows on its own; leave it and the whole £420,000 does, and a quarter of the larger number is still tax-free later. Nothing is lost by waiting except the use of the money.
Inside a pension it is sheltered. In a savings account, interest above the personal savings allowance — £1,000 for a basic-rate taxpayer, £500 for a higher-rate one — is taxable, and you can only shelter £20,000 a year in an ISA. A large lump sum sitting in cash for a decade quietly loses to inflation.
Taking tax-free cash on its own does not normally cut what you can still pay into pensions. Taking taxable income flexibly does, and it drops your annual allowance from £60,000 to £10,000 permanently. If you are still earning and still contributing, that trap is the expensive one, and plenty of people walk into it by accident.
Money left in a pension used to sit outside your estate. From April 2027, as legislated, unused pension funds are counted for inheritance tax. That does not make taking the cash right — but it removes one of the standard arguments for leaving it, and a lot of advice still circulating online predates it.
Malcolm is 57, runs a small engineering firm, wants to stop at 63. He has £420,000 across three pensions, so up to £105,000 is available tax-free. He has a mortgage: £62,000 left, eight years to run, 5.6%, costing him £803 a month.
He wants to take £62,000 and clear it. Here is what that actually costs and buys, in pounds.
Eight years of payments is £77,088 against a £62,000 debt. He avoids about £15,100 of interest. That is real and it is certain.
£62,000 left invested at 3% above inflation for the eight years to 65 would be worth about £78,500 in today's money. So he forgoes roughly £16,500 of real growth.
£15,100 saved against £16,500 given up. Near enough level — and that is the honest headline. Anyone telling Malcolm that clearing the mortgage is obviously right, or obviously wrong, has not done the sum.
He now has £803 a month he wasn't spending before. Redirected for eight years that is £77,000. Spent, it is a nicer eight years and a worse retirement. Which of those happens is the entire decision, and it is a question about him, not about pensions.
Clear the mortgage and spend the £803: his money ran out at 86. Clear it and redirect the £803: 93. Leave the pension alone and keep paying the mortgage: 91. Three defensible choices, seven years apart. That spread is the thing you cannot see without running it, and it is why we would rather hand somebody three numbers than an opinion.
Notice what he did not need: £105,000. He needed £62,000. The other £43,000 stays where it is, still a quarter of a bigger pot, still tax-free when he wants it. The free projection will do this shape of sum on your own figures in about two minutes.
Not recommendations — patterns we see where the arithmetic usually stacks up, and where it usually doesn't. Your version may differ, which is rather the point of modelling it.
Clearing expensive debt, funding a bridge between stopping work and the State Pension arriving at 67, a house adaptation, a business needing capital. A specific job with a number attached is a reason. “Having it available” is not.
The strongest use we see is going part-time at 58 instead of full-time to 63. Tax-free cash covering the income gap for a few years can be worth more to somebody than the same money at 70.
Then the cost is real and the benefit is a feeling. Sheltered money moved into an unsheltered account to sit still is the one version of this where the numbers are rarely close.
Worth understanding the allowance rules cold before you touch anything, because the £60,000-to-£10,000 drop is triggered by how you take money, and it does not reverse.
We will model what taking £30,000, £60,000 or £105,000 does to the age your money runs out, and what each does to your tax. We will not tell you which pension to take it from, whether to move a pot, or what to do with the proceeds — those are regulated recommendations and Buzz is not authorised to make them. Where that is genuinely the decision, we say so and can introduce you to Equity & General (FCA 474163). Entirely optional, and if you become their client E&G pay Buzz a commission, which we tell you before the introduction rather than after.
Four things, in order, none of which commit you to anything.
“I want the tax-free cash because…” If it ends in a number and a purpose, carry on. If it ends in “it's there”, that is worth noticing before you act.
Current values on every pension, and your State Pension forecast from gov.uk. Most people are working from a figure that is several years out of date, usually low.
The lump sum question is unanswerable without it. The free Healthcheck reads it off your actual outgoings in about two minutes, which beats guessing — almost nobody guesses right.
The free projection gives you the age your money runs out under different amounts. The Plan, at £399, does it properly — UK tax applied year by year, the stress tests, and the trade-offs written down. Ongoing planning is £49 a month if you want it re-run as things move.
No. This is the single most damaging myth in the subject and it costs people real money. The tax-free entitlement does not expire and it is not attached to a birthday. It is 25% of the pot at the point you take it, capped by the lump sum allowance of £268,275 — so if the pot grows while you wait, the tax-free amount grows with it.
Yes, and it is the part most people don't realise is available. You can crystallise a slice of the pot, take the tax-free cash from that slice, and leave the rest untouched. Whether phasing suits you depends on what the money is for and on your tax position each year — the mechanics exist either way, and how a scheme handles it varies, which is worth asking your provider directly.
Taking tax-free cash on its own does not normally trigger the money purchase annual allowance. Taking taxable income flexibly does, and it cuts what you can contribute from £60,000 a year to £10,000, permanently. The distinction is technical, easy to fall foul of, and matters enormously if you are still earning — check it before you act rather than after.
The tax-free element is not taxable income, so it is not emergency-taxed. The trap is on the taxable part: HMRC often taxes a first flexible withdrawal on a month-one basis, as if you were going to take that amount every month, so the deduction can be far too big. It is reclaimable — HMRC has specific forms for it — but you may be out of pocket for weeks, which matters if you were counting on the money for something dated.
It genuinely depends, and the sum is usually closer than people expect — in the worked example above the interest saved and the growth given up were within about £1,400 of each other over eight years. What decides it is rarely the arithmetic: it is whether the freed-up monthly payment gets redirected or absorbed, how you feel about debt, and how secure your income is. We will model both and show you the difference in years. Choosing between them is yours.
No. Financial planning is not regulated advice, and this page is information. We describe how the rules work and model what different choices do to your own projection. Recommending a product, a provider, or a specific course of action with your pension is regulated advice, which Buzz is not authorised to give — where that is what you need, we say so and can introduce you to Equity & General (FCA 474163), with the commission we would receive disclosed beforehand. You can check any firm on the Financial Services Register at register.fca.org.uk.