Over the years, many of us end up with several pensions from different jobs — some large, some small, and sometimes a bit forgotten about until retirement looms.
When it comes time to draw from them, one question comes up again and again:
“Can I take the whole thing tax-free?”
The rules around pensions can feel confusing, so let’s clear up some common myths.
Myth 1: “If my pension pot is small, I can take it all tax-free.”
Not quite.
There is a rule for “small pots” — pensions worth less than £10,000. You can take these out in one go without triggering some of the usual restrictions.
But here’s the key detail: only 25% of the pot is tax-free. The rest is taxed as income.
So even if you cash in a £9,000 pot, just £2,250 is tax-free — the other £6,750 counts as taxable income.
Myth 2: “I can take 25% of each pot tax-free, no matter what.”
This is closer to the truth.
From age 55 (rising to 57 from April 2028), you can usually take 25% tax-free from each pension pot you access. The rest is taxed as income in the year you take it.
However, there is an overall cap — called the Lump Sum Allowance (LSA) — currently set at £268,275.
That’s 25% of the old Lifetime Allowance of £1,073,100. In other words, you can’t take more than £268,275 tax-free across all your pensions combined.
For most people, this won’t be an issue unless your total pensions are over £1 million.
Myth 3: “If my pot is £19,000, I can take it all without paying tax.”
Sadly, no.
Let’s say Joan Bloggs has a £19,000 pension pot. If she cashes it in:
- £4,750 (25%) is tax-free.
- £14,250 (75%) is taxable income in that year.
This could push her into a higher tax band depending on what other income she has.
What This Means for You
The truth is that pensions are flexible — but not entirely tax-free. Some key points to remember:
- You don’t have to take all your pensions at once.
- The 25% tax-free allowance applies each time you access a pot.
- The £268,275 limit only affects people with very large pension savings.
- Timing withdrawals carefully can help you avoid an unnecessary tax bill.
Final Thoughts
The idea of “tax-free cash” from pensions is often misunderstood. While you can enjoy a healthy tax-free portion, the rest will almost always be taxed as income.
The good news? With some smart planning, you can make the most of what’s available and avoid any nasty surprises.
✅ Disclaimer: This blog is for general information only and should not be taken as personal financial advice. Please seek regulated financial advice if you need tailored recommendations. Read more on the HMRC website here.