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Exploring Tax Free Cash

article published: 22/05/2023

When it comes to accessing your pension savings in the UK, understanding tax-free cash is essential. Tax-free cash, also known as a pension commencement lump sum (PCLS), allows you to withdraw a portion of your pension savings without paying any tax. In this blog post, we'll explain how it works, who is eligible, and what it means for your retirement finances.

Tax-free cash offers a valuable opportunity for individuals in the UK to withdraw a portion of their pension savings without paying tax on it.

What is Tax-Free Cash?

Tax-free cash refers to a lump sum withdrawal that you can take from your pension savings without having to pay tax on it. Generally, you can withdraw up to 25% of your total pension pot as tax-free cash, while the remaining 75% is subject to taxation when accessed.

Who can access their Tax-Free Cash?

To access tax-free cash from your pension, there are a few requirements to meet, which may vary depending on your pension scheme and personal circumstances. The typical criteria include reaching the minimum pension age (usually 55 years or older) and having a defined contribution pension. If you have a defined benefit or final salary scheme, the rules for accessing tax-free cash may be different, often involving calculations based on your salary and years of service.

Products available after withdrawing Tax-Free Cash: Once you have taken your tax-free cash from your pension fund, the remainder can be used to provide a regular income if needed.

     a. Annuity Purchase: You can use the remainder or also the tax-free cash to purchase an annuity, which provides a regular income throughout your retirement. Annuities offer a guaranteed income stream, but they may not provide the same flexibility or growth potential as other options.

     b. Flexi-Access Drawdown: With flexi-access drawdown, you can keep your pension invested while taking regular or irregular withdrawals, including tax-free cash. This option gives you greater control over your retirement funds, allowing you to adjust your income withdrawals as needed.

Understanding Tax Implications

While tax-free cash itself is not subject to taxation, it's important to consider the tax implications when accessing your pension. The remaining 75% of your pension pot, which is not taken as tax-free cash, will be subject to income tax when you withdraw it. Depending on your total income in a given tax year, these withdrawals may push you into higher tax brackets.

Seeking Professional Guidance

Given the intricacies and potential tax implications, it's highly recommended to consult a qualified professional such as a regulated financial adviser or pension specialist before accessing your pension benefits. They can help you understand the tax implications, evaluate different withdrawal options, and create a retirement income strategy that aligns with your goals and circumstances.


Tax-free cash offers a valuable opportunity to withdraw a portion of pension savings without paying tax on it. By understanding the rules, eligibility criteria, and various options for using tax-free cash, you can make informed decisions about your retirement finances. Remember to seek professional guidance to maximise your pension benefits while effectively managing tax implications. With careful consideration, you can make the most of your pension savings and enjoy a financially secure retirement.

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