Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
When it comes to withdrawing from your pension it can be difficult to know where to start. How much? When? What does it mean for your future income? And understanding the tax implications is an important part of the process.
Typically, you can take up to 25% of your pension savings tax-free. This is known as your tax-free cash (TFC). You can choose to take it as a single lump sum or in smaller amounts over time. The process of accessing your pension in this way is called ‘crystallising’ your pension.
The below chart is a breakdown of the split between TFC and taxable money within a pension pot.
How tax-free cash works
Everyone has a lump sum allowance of £268,275, which is the maximum you can withdraw from your pension without paying tax.
To access your pension and begin withdrawing you’ll need to have reached the Normal Minimum Pension Age (NMPA). Right now, it’s 55 but is due to increase to 57 from 6 April 2028.
Remember: You don’t have to take all your tax-free cash in one go – you can withdraw smaller portions over time as you crystallise parts of your pension.
What are your options?
1. Tax-free cash
When it comes to taking your tax-free cash, you can choose between taking all your available tax-free cash, or a specific amount. Tax-free cash can be paid all at once or in smaller withdrawals as you crystallise your pension.
When you take your 25% tax-free the remaining 75% moves into ‘flexi-access drawdown’. That money stays invested and can be withdrawn at a later point but will be subject to income tax when you withdraw.
2. UFPLS
Another withdrawal option is an Uncrystallised Funds Pension Lump Sum (UFPLS). UFPLS payments are also paid as lump sum payments in one go. The main difference with these types of payments is not all the money withdrawn is tax-free.
UFPLS payments consist of 25% being paid tax free and 75% being taxed as income.
Key difference:
- Flexi-access drawdown – 25% of your pot is taken tax-free, and the remaining 75% stays invested for future withdrawals.
- UFPLS – each payment is split 25% tax-free and 75% taxable.
The below is an example of how a UFPLS payment of £10,000 is split.
Caution: Processing an UFPLS payment triggers the ‘Money Purchase Annual Allowance’ (the MPAA). So, your annual allowance – the amount you can pay into your pension pots each year and receive tax relief on – will reduce to £10,000 from the normal £60,000.
You can find out more about tax relief and all the allowances in our pension allowances section.
How your investments are sold
Where possible, we’ll pay your tax-free lump sum from the Pension Cash account, if there’s enough cash available. If there isn’t, we’ll sell investments proportionately across your pension to make up the shortfall.
If you’d prefer your tax-free cash to come from specific funds, you’ll need to sell the necessary units first. This ensures there’s enough Pension Cash available when you apply to take your payment.
That’s why it helps to plan ahead.
What if you want more than your 25%?
You can withdraw more than your tax-free cash. But anything above 25% will be subject to income tax at your marginal rate.
So, if you take more, be aware:
- It could push you into a higher tax bracket.
- You may trigger the ‘Money Purchase Annual Allowance’ (MPAA), and your annual allowance could drop to £10,000.
So, keep this in mind if you plan to continue adding to your pension pots. Our pension tax calculator can help you work it out.
Planning your next move
You can take your tax-free cash any point after you reach the Normal Minimum Pension Age (NMPA). Whether that’s before you retire, whilst you’re still working and contributing, or at the point when you stop work. The choice is yours.
Whatever your circumstances, here are some things you should consider:
- Leave enough money to fund your retirement for 20 years or more.
- If you have multiple pensions, consider consolidating to make things easier. Learn more about transferring your pension.
- If you’re unsure about what to do with your tax-free cash, you might want to leave it invested.
- Remember taking your tax-free cash is just one part of your retirement income plan. When you want to access more money from your pension you have a number of options that you can explore in our approaching retirement section.
How to access
If you’re looking to take your tax-free cash or an UFPLS payment you’ll need to go to the access your pension page:
- Scroll half-way down the page to find the heading ‘Apply to take tax-free cash or lump sums online’
- At the bottom of this section click the green box ‘Apply for FAD or UFPLS online’
Where to get help
The government’s Pension Wise services offer free, impartial guidance to help you understand your options at retirement. Visit https://www.moneyhelper.org.uk/en or call 0800 138 3944.
Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.
Important information: - investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in an ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). It’s important to understand that pension transfers are a complex area and may not be suitable for everyone. Before going ahead with a pension transfer, we strongly recommend that you undertake a full comparison of the benefits, charges and features offered. To find out what else you should consider before transferring, please read our transfer factsheet. If you are in any doubt whether or not a pension transfer is suitable for your circumstances we strongly recommend that you seek advice from one of Fidelity’s advisers or an authorised financial adviser of your choice. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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