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Should I take my pension lump sum at 55?
Reaching age 55 is a key milestone in pension planning. In 2025-26, this is the point where you can potentially withdraw up to 25% of the value of your pensions, tax-free. This is a big decision marked by huge opportunities and risks. In this article, our Teesside financial advisers explain the key considerations of taking a tax-free pension lump sum, some pitfalls to avoid and how to turn this aspect of the pension system to your advantage.
How does the tax-free lump sum work?
The tax-free pension lump sum is technically called the Pension Commencement Lump Sum (PCLS). This refers to the part of your pension(s) that can be taken out, without incurring any income tax charge.
In 2025-26, up to 25% of your pension pot can be taken tax-free. This is available under most defined contribution (DC) pension schemes after you reach age 55. Please note that this age limit is set to rise to 57 in April 2028.
You cannot withdraw more than a total of £268,275 as lump sums from your pensions. Also, you must “crystallise“ (formally access) your pension to take the lump sum. This involves:
- Taking 25% of the crystallised amount as a tax-free PCLS.
- Leaving the rest invested in drawdown or using it to buy an annuity.
Alternatively, you can take a UFPLS (Uncrystallised Funds Pension Lump Sum). Here, you can take a single lump sum or a series of lump sums. 25% of each withdrawal is tax-free, whilst the rest is taxed as income. This can be useful if you want flexible access to your pensions without crystallising your entire pot.
Context and Purpose
Before taking any action, consider what you might want to achieve with a pension lump sum. How does it fit into your overall retirement plan? Is this lump sum a “bonus” to yourself or an essential part of your income strategy?
Remember, pension pots grow free of income tax, capital gains tax (CGT) and inheritance tax (for now – this last tax exemption is potentially changing in 2027). Making a withdrawal means less capital left to generate future income – e.g through drawdown or annuity.
However, there is a time-limited opportunity for certain individuals. Currently, over-55s are able to access their PCLS, but in April 2027, this age barrier will rise to 57. If you will reach 55 before that date and might want to access your pension, consider speaking with an adviser.
Taking a lump sum can have many advantages. It gives you liquidity, which is useful if you want to pay off debts (or a mortgage), fund early retirement, support family members or invest elsewhere (e.g. into property).
The MPAA (Money Purchase Annual Allowance)
The Money Purchase Annual Allowance (MPAA) is a little-known rule that sometimes trips people up when accessing their pensions.
If triggered, your maximum annual allowance (to make pension contributions which benefit from tax relief) is lowered to £10,000 per year. This could harm certain individuals’ ability to save further towards retirement.
You don’t trigger the MPAA if you only take the PCLS – meaning you can still contribute up to £60,000/year (2025-26) into pensions if eligible.
However, the MPAA is a complex area of tax planning. To navigate it properly, consider getting financial advice before accessing your pension so you do not trigger the rules before you are ready.
The Wider Picture
It is important to consider the potential knock-on effects of taking a tax-free lump sum from your pension. These could be positive or negative, depending on your goals and situation.
For instance, using some (or all) of the money to pay off debt, particularly high-interest debt or a mortgage, can give you a guaranteed “return” equal to the interest you’re no longer paying. However, you may need an adviser’s knowledge and tools to evaluate the calculations properly.
Alternatively, a lump sum could help to fund a lifestyle or major life change. Maybe you want to start a business or consultancy, and your lump sum could help seed it. Perhaps you could use it to fund further education for yourself or children/grandchildren, or set some aside for bucket list travel. After all, 55 can be a great time for semi-retirement, new ventures or a lifelong dream.
Be careful if you are thinking about keeping any lump sum in cash. This asset can be useful for short-term goals (within 1–3 years), but cash loses value over time due to inflation. As such, try to avoid keeping large sums idle for too long.
Invitation
Your tax-free pension lump sum could offer a unique opportunity to shape your financial future and lifestyle at age 55. However, it can be difficult to know the potential impact of a withdrawal on your own.
A financial adviser can assist here, using cashflow modelling to show how different uses of your lump sum could play out over time.
We hope this content gave you more clarity. To discuss your own financial plan, please get in touch to arrange a free, no-commitment consultation with an adviser here in County Durham.
Your capital is at risk. Investments can go down as well as up. Past performance is not indicative of future results. Tax treatment depends on individual circumstances and may change. Content is for information only and not investment advice. Any decision to invest is the reader’s own. Diversification is key to managing risk. Market volatility affects investment values. Inflation erodes savings. Liquidity risks may prevent quick access to funds.