Pension Tax-Free Lump Sum Limit Frozen at £268,275
UKPulse Money Desk
Individuals can take up to 25% of their defined contribution pension tax-free, subject to a maximum lump sum allowance of £268,275, which has been frozen.
- Up to 25% of a defined contribution pension can be taken tax-free from age 55, rising to 57 in April 2028.
- The maximum tax-free lump sum is capped at £268,275, an allowance introduced in 2024.
- This lump sum allowance has been frozen, meaning more people may eventually approach the limit.
Individuals with defined contribution pensions can access up to 25% of their pot as a tax-free lump sum once they reach age 55. This age threshold is set to increase to 57 from April 2028.
However, there is an upper limit to this tax-free amount. The specific lump sum allowance, introduced in 2024, is £268,275. Any amount taken above this threshold will be subject to a tax charge.
Tom Selby, AJ Bell's Director of Public Policy, noted that this allowance has been frozen. While currently out of reach for most people, a prolonged freeze could lead to more individuals approaching this limit over time. Ruby Flanagan of Which? Money highlighted that rumours about potential changes to the tax-free lump sum have led some people to withdraw their pensions earlier than planned in recent years, though the allowance has not been altered.
Why this matters: The frozen tax-free lump sum allowance means that while most people are currently unaffected, a growing number could eventually reach this limit, impacting how much of their pension they can access without incurring tax.
What this means for you: If you have a defined contribution pension, you can take up to 25% of it tax-free from age 55 (rising to 57 in April 2028), but this is capped at £268,275. Amounts above this limit will be taxed.