Being able to take part of your pension without paying Income Tax can make retirement feel like an especially important financial milestone.
Usually, you can take up to 25% of your pension tax-free, subject to the standard Lump Sum Allowance of £268,275 in 2026/27.
However, just because you can access this money doesn’t necessarily mean taking the maximum amount as soon as you stop working is right for you.
Indeed, research reported by Professional Paraplanner found that 38% of over-55s had no plan for their pension tax-free cash. Of those with a plan:
- 7% said they’d leave it in a current account
- 14% said they’d put it in an easy access savings account
- 16% said they would use it to supplement their retirement income
- 17% said they’d place it in a Cash ISA.
Taking your money from your pension can affect how much remains invested, how you fund retirement, and potentially the tax elsewhere.
With that in mind, continue reading to discover five vital questions worth asking yourself before making a withdrawal.
1. “What do I actually need to use the tax-free cash for?”
A useful starting point is to establish exactly why you want to take money from your pension. You might have a clear purpose for it, such as:
- Repaying expensive debt
- Clearing some, or all, of your mortgage
- Funding home improvements
- Helping younger loved ones onto the property ladder
- Paying for a dream holiday.
In these cases, accessing tax-free cash could form a useful part of your retirement plan. However, taking £100,000 simply because you’re entitled to it, then leaving the money in a bank account, may be less beneficial.
Before withdrawing anything, it’s worth considering how much your goals actually cost. If you need £30,000, there may be little reason to withdraw £100,000 simply because that’s the maximum amount available to you.
Doing so could help you avoid removing more wealth from your pension than needed while ensuring any withdrawals have a purpose.
2. “Would leaving more of my pension invested support my long-term plans?”
If you don’t need the money immediately, leaving it inside your pension could offer several advantages.
Money held in a defined contribution pension typically remains invested, giving it the potential to grow over time.
Imagine you have a pension worth £400,000 and are entitled to take £100,000 tax-free. If you withdraw the entire £100,000, only £300,000 would remain in your pension.
Leaving some, or all, of your tax-free entitlement means more of your wealth could potentially benefit from future investment growth.
Of course, investment returns are never guaranteed, and the value of your assets could fall as well as rise, especially over shorter periods.
Still, if your retirement could last 20, 30, or 40 years, continuing to invest part of your wealth may be important to keep pace with inflation and ensure your pension can support you throughout later life.
You also don’t have to take all of your tax-free cash at once. Depending on your pension and how you access it, you may be able to take smaller amounts over time while leaving the rest invested.
3. “Could my other savings and investments fund my plans instead?”
Your pension is likely only one part of your financial plan, and you might also have:
- Cash savings
- ISAs
- Investments
- Property income.
Looking at these assets together could help you decide where to draw money from. For instance, you might already hold more cash than you realistically need for emergencies. Using some of this money for a planned purchase could let you keep your pension invested longer.
Alternatively, you might use ISA withdrawals alongside your pension income. Money withdrawn from an ISA is typically free from Income Tax and Capital Gains Tax.
The most appropriate approach will generally depend on factors such as your income needs and long-term goals, so considering your 25% tax-free entitlement alongside your other assets could help you create a more sustainable retirement income strategy.
4. “Have I considered how taking the money could affect my tax position?”
While qualifying pension tax-free cash itself isn’t normally subject to Income Tax, what you do with it afterwards could still have tax implications.
For example, if you withdraw a large lump sum and then invest it outside a tax-efficient wrapper, such as an ISA, any future dividends or gains could potentially become taxable.
There are also upcoming Inheritance Tax (IHT) changes to consider.
From 6 April 2027, most unused pension funds and death benefits will be included in the value of your estate for IHT purposes.
This means that some of the estate planning advantages traditionally associated with leaving money inside a pension will change.
However, this doesn’t necessarily mean withdrawing pension wealth before April 2027 is the right response. Your own retirement income needs, estate plans, and potential IHT liability will all need to be considered together, which a financial planner could help with.
The Financial Conduct Authority does not regulate tax and estate planning.
5. “Am I considering a withdrawal due to speculation over rule changes?”
Pensions regularly become the subject of speculation before Budgets and other significant fiscal events.
Headlines suggesting the government might reduce the amount of tax-free cash you can take may understandably create pressure to act before any potential change takes effect.
Yet, withdrawing money from your pension can be difficult to reverse. So, making the decision purely because of speculation could leave you regretting it if a predicted change never materialises.
Indeed, research reported by FTAdviser found that 61% of retirees who withdrew tax-free pension cash ahead of the 2025 Autumn Budget later regretted doing so.
Of those who made a withdrawal, 41% said they’d acted because they expected pension rules to change.
Rather than reacting to rumours, it may be prudent to return to the questions above.
If taking tax-free cash supports a specific goal, fits alongside other assets, and makes sense within your long-term retirement plan, then accessing it could be appropriate.
If not, waiting until you genuinely need the money could help you avoid making an irreversible decision based on speculation.
Get in touch
We could help you consider what you might need your 25% tax-free lump sum for and what leaving more of your pension invested could mean for your future income.
Please email us at info@investmentsense.co.uk or call 0115 933 8433 to find out more.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.
All information is correct at the time of writing and is subject to change in the future.
