Yes, with a defined contribution pension, you can take 25% of each withdrawal tax-free (known as UFPLS or partial drawdown). However, you do not get a new 25% allowance every year; once your total 25% lifetime allowance (usually up to £268,275) is used, all subsequent withdrawals are taxed as income.
In the UK, the general rule is simple: you can take up to 25% of your pension pot tax free once you reach the minimum retirement age. Right now, that's age 55 – but it's rising to 57 from 2028. This tax-free chunk is usually taken when you start accessing, or crystallising, your pension.
With this option, each time you take money from your pension pot, 25% of it is usually tax free and you may pay tax on the other 75% of each lump sum. Different amounts can be taken each time with the remainder of your money staying invested, giving it a chance to grow.
(Read more about retirement income options). If you withdraw 25% of your pension savings, you're immediately reducing the value of your pension pot. And you're also taking away the chance for that money to potentially grow through returns on investments.
The new 2025 regulations have reduced the mandatory annuity requirement from 40% to 20% for eligible non‑government subscribers. The Over ₹12 Lakh Threshold: If your accumulated pension wealth exceeds ₹12 lakh, you can now withdraw up to 80% as a lump sum. You only need to use the remaining 20% to purchase an annuity.
A member may make a partial or full withdrawal of the funds once a year. The only limit is that the member must withdraw a minimum of R2 000, which means the balance in the fund must be at least R2 000. There is no cap on how much the member can withdraw.
From 20 September 2025, the full pension is available, under the assets test, for homeowner singles whose assessable assets are under $321,500 – for homeowner couples the number is $481,500. The numbers for non-homeowners are $579,500 and $739,500 respectively.
The most tax-efficient way to draw a pension involves a blended strategy, often starting with tax-free cash (up to 25% in the UK) then strategically withdrawing from taxable accounts (like 401(k)s) before Roth accounts, using proportional withdrawals across account types for stable tax bills, or taking smaller, flexible "drawdowns" to manage income and tax brackets over time. Key methods include taking the tax-free lump sum (PCLS), phased withdrawals, or using Uncrystallised Funds Pension Lump Sum (UFPLS) (UK) or rollovers (US) to defer tax.
Retiring or Taking a Pension Before 59 1/2
If you take a distribution from your retirement plan early (meaning before the day you turn 59 1/2), you'll generally have to pay a 10% early distribution tax above and beyond any regular income taxes you may owe on the money.
The "pension 5-year rule" refers to different IRS rules for retirement accounts (like Roth IRAs needing 5 years for tax-free earnings), beneficiary rules (requiring heirs to empty inherited accounts within 5 years), and specific employment pensions (like Federal or Congressional plans requiring 5 years of service for vesting or benefits). It can also relate to UK pension rules for overseas transfers (QROPS) or breaks in service for public sector workers, preventing tax avoidance or loss of benefits.
The key to a tax-free pension rollover is to keep your pension distribution intact in a rollover account until you reach age 59 1/2. Or, should you absolutely need to tap into your pension funds before then, do so sparingly and wisely.
For personal pensions, personal retirement savings accounts and occupational pension scheme members transferring to approved retirement funds (ARFs) at retirement, it is generally possible to take up to 25% of your fund as a tax-free lump sum, subject to certain Revenue limits.
From age 55 (57 from April 2028), you can usually take up to 25% of your pension money without needing to pay any tax. This is called a tax-free lump sum.
Up to 25% of the total value of your pension can be withdrawn tax-free. Rumours that this allowance could be cut has already had an impact – in the most recent FCA Retirement Income Market stats, the number of plans entering drawdown where only tax-free cash was taken surged by 29% between 2023-24 and 2024-25.
Individuals must pay an additional 10% early withdrawal tax unless an exception applies. Use Form 5329 to report distributions subject to the 10% additional tax on early distributions from a qualified retirement plan, including traditional IRAs.
Immediate Benefits: By starting your pension at 65, you can begin receiving consistent income, which can help in managing your retirement expenses early on. Maximizing Lifetime Income: The sooner you start receiving your pension, the sooner you begin to benefit from the years of contributions you've made.
From age 55 (57 from April 2028), you can usually take up to 25% from each of your pensions without paying any tax, provided you: take the money as one or more lump sums (rather than regular income) and.
Neither a lump sum nor an annuity is inherently better; the best choice depends on your financial situation, risk tolerance, and goals, with annuities offering guaranteed income for longevity but less flexibility, while a lump sum provides control for investment and estate planning but carries higher risk of mismanagement or outliving funds. Annuities suit those needing predictable income and security, while a lump sum suits disciplined investors with other income streams or specific estate planning needs, though it comes with major tax implications and potential for overspending.
The top ten financial mistakes most people make after retirement are:
So taking all of your tax-free lump sum at once could mean you get less in your pocket over the long term than you would if you took it in smaller chunks. The second reason is that taking your tax-free lump sum in chunks over time is a tax-efficient way of taking your pension savings.
For people aged 60, Fidelity's retirement savings guidelines recommend an amount in savings worth six times your salary in order that you have enough to maintain your standard of living in retirement. So, someone earning £60,000 would need £360,000 in savings - which can mean money both inside and outside of pensions.
People of pension age can have up to £10,000 savings in the bank before it affects their pension credit. So if you have savings over £10,000, it will start to count towards your income calculation. Every £500 over £10,000 will be calculated as £1 additional income per week.