Finance glossary
Tax-Free Lump Sum
Also known as: Pension Commencement Lump Sum, PCLS, 25% tax-free cash
In simple terms
When you start taking a pension you can usually take a quarter of it as a one-off, tax-free cash sum — the rest is taxed as income when you draw it.
On this page
What does tax-free lump sum mean?
The tax-free lump sum (formally the Pension Commencement Lump Sum) is the portion of a defined contribution pension you can usually take without paying income tax — normally up to 25% of the pot.
The rest of the pension is taxable as income when you take it.
How the tax-free lump sum works
From the normal minimum pension age you can take up to 25% of your pot tax-free, either all at once or in stages. There is an overall cap on the total tax-free amount across all your pensions (the lump sum allowance).
You can take the tax-free cash and leave the rest invested in drawdown, use it to buy an annuity, or take taxable lump sums alongside it.
How could this affect me?
Tax-free cash is a valuable feature of pensions, but taking a large lump sum early reduces what stays invested for later income. It is worth thinking about what you actually need it for.
Cash you take out and leave in a bank account no longer benefits from the pension’s tax shelter and could affect means-tested benefits.
Things to watch out for
- Taking the cash early leaves less invested to provide future income.
- There is an overall cap on total tax-free cash across your pensions.
- Money moved out of a pension loses its tax shelter and may affect benefits.
Know your rights
- You can normally take up to 25% of a defined contribution pension tax-free from the normal minimum pension age, subject to the lump sum allowance (GOV.UK).
- Free, impartial guidance is available from Pension Wise/MoneyHelper before you decide.
General information, not personal advice
Consumer Credit is an independent information service. We do not provide regulated financial advice or sell financial products. For advice on your own situation, speak to an appropriately authorised firm or a free service such as MoneyHelper. About Consumer Credit.
Sources
We checked this page against these official and authoritative sources.
- MoneyHelper, Taking your pension: tax-free cash (opens in a new tab). Accessed 22 Aug 2026.
- GOV.UK, Tax when you get a pension (opens in a new tab). Accessed 22 Aug 2026.