Pension Lump Sum Allowance (LSA) 2026: How Much Can You Take Tax-Free?

Taking a tax-free lump sum from your pension is one of the most valuable perks in the UK tax system. But since the lifetime allowance was scrapped in April 2024, the rules governing how much you can take have changed — and not everyone has caught up.

The key number: £268,275. That's the maximum tax-free lump sum you can take across all your pensions combined. Go over it, and HMRC taxes the excess at your marginal rate.

Here's how the lump sum allowance works, what counts towards it, and how to make the most of it.

The Lump Sum Allowance (LSA): Your £268,275 Cap

The lump sum allowance (LSA) replaced part of the old lifetime allowance system from 6 April 2024. It sets a single, straightforward limit: £268,275 is the maximum total tax-free lump sum you can receive from all your pensions during your lifetime.

Where does that number come from? It's exactly 25% of the old lifetime allowance of £1,073,100.

The LSA covers:

• Pension commencement lump sums (PCLS) — the standard 25% tax-free cash when you start drawing your pension
• The tax-free portion of uncrystallised funds pension lump sums (UFPLS) — where you take chunks directly from an untouched pot, with 25% of each payment being tax-free
• Certain other tax-free lump sums, such as serious ill-health lump sums paid before age 75

Every time you take a tax-free lump sum, it reduces your remaining LSA. Once you've used the full £268,275, any further lump sums are taxed as income.

How the 25% Rule Works With the LSA

You can still take up to 25% of each individual pension pot tax-free — but the total across all pots can't exceed £268,275.

For most people with modest to mid-sized pensions, this changes nothing. If your combined pension pots total £1 million or less, 25% is £250,000 or less, comfortably within the cap.

It starts to bite when your total pots exceed £1,073,100. At that point, 25% would exceed the LSA.

Example: Sarah has two pension pots — a workplace pension worth £600,000 and a SIPP worth £700,000. Total: £1.3 million.

• 25% of £600,000 = £150,000 tax-free ✅ (£118,275 LSA remaining)
• 25% of £700,000 = £175,000 — but Sarah only has £118,275 of LSA left
• She takes £118,275 tax-free from the second pot. The remaining £56,725 she'd planned to take as a lump sum would be taxed at her marginal rate

Sarah's effective tax-free percentage on the second pot drops from 25% to about 17%.

The LSDBA: The Bigger Cap You Need to Know About

Alongside the LSA sits the lump sum and death benefit allowance (LSDBA), set at £1,073,100.

The LSDBA is a broader limit covering:

• All tax-free lump sums you take during your lifetime (i.e., everything that counts towards your LSA)
• Plus any tax-free lump sum death benefits paid from your pensions when you die

Think of it this way: the LSA (£268,275) is a sub-limit within the LSDBA (£1,073,100). Your lifetime tax-free lump sums eat into both. The remaining LSDBA after your death determines how much your beneficiaries can receive tax-free as a lump sum.

Example: If you take your full £268,275 LSA during your lifetime, your remaining LSDBA is £804,825. If you die before 75, your beneficiaries could receive up to £804,825 as a tax-free lump sum death benefit.

This matters for estate planning — particularly with pension inheritance tax changes coming in April 2027.

What Counts Towards Your LSA (and What Doesn't)

Not every pension payment uses up your lump sum allowance. Here's what counts and what's exempt:

Counts towards your LSA

Payment type	How it's measured
Pension commencement lump sum (PCLS)	Full amount of the tax-free lump sum
UFPLS (tax-free portion)	25% of each UFPLS payment
Serious ill-health lump sum (before 75)	Full amount
Defined benefit commutation	Amount of tax-free cash taken

Does NOT count towards your LSA

Payment type	Why it's exempt
Small pot lump sums (≤£10,000)	Specifically excluded from LSA
Trivial commutation lump sums	Excluded
Drawdown income	Not a lump sum — it's income
Annuity income	Not a lump sum
State pension	Separate system entirely

The small pots exemption is particularly useful. You can cash in up to three personal pensions worth £10,000 or less each, plus unlimited occupational pension small pots, without touching your LSA at all.

UFPLS: The Flexible Alternative

An uncrystallised funds pension lump sum (UFPLS) lets you take money directly from an untouched pension pot without formally entering drawdown. Each UFPLS payment is split:

• 25% tax-free (counts towards your LSA)
• 75% taxable as income at your marginal rate

UFPLS can be useful if you want ad-hoc access to your pension without committing to drawdown. But be aware:

• The tax-free portion still uses your LSA
• Taking any UFPLS triggers the money purchase annual allowance (MPAA), dropping your annual pension contribution limit from £60,000 to £10,000
• The 75% taxable portion could push you into a higher tax bracket if you take large amounts

Example: Mark takes a £40,000 UFPLS from his SIPP. He receives £10,000 tax-free (which reduces his LSA by £10,000) and £30,000 taxable. If Mark is a basic rate taxpayer, he'd pay £6,000 in income tax on the £30,000 — receiving £34,000 net.

For a clearer picture of how different withdrawal strategies affect your tax bill, try the PoundSense pension calculator to model your options.

Protected LSA: If You Had Lifetime Allowance Protection

If you held valid lifetime allowance protection before 6 April 2024 — such as fixed protection 2016, individual protection 2016, or earlier protections — you may have a higher LSA than the standard £268,275.

Your protected LSA is calculated as 25% of your protected lifetime allowance. For example:

• Fixed protection 2016 (£1.25m LTA) → protected LSA of £312,500
• Individual protection 2016 (varies, up to £1.25m) → protected LSA of up to £312,500
• Primary protection (varies) → protected LSA based on your registered amount
• Enhanced protection → could give an even higher LSA, depending on your specific circumstances

If you had protection, your pension provider should have your details on file. Check with them — and don't inadvertently lose your protection by making new contributions if your protection type prohibits it.

How the LSA Affects Defined Benefit Pensions

If you have a defined benefit (DB) pension — a final salary or career average scheme — the LSA works slightly differently.

Most DB schemes offer a commutation option: you give up part of your annual pension in exchange for a tax-free lump sum. The commutation rate varies by scheme but is typically between 12:1 and 20:1 (meaning you sacrifice £1 of annual pension for £12–£20 of lump sum).

The tax-free cash you take through commutation counts towards your £268,275 LSA, just like a DC pension's PCLS.

Example: James has a DB pension paying £25,000 per year. His scheme offers a 15:1 commutation factor. He could sacrifice £5,000 of annual pension (reducing it to £20,000 per year) in exchange for a £75,000 tax-free lump sum. This £75,000 reduces his LSA to £193,275.

If you have both DB and DC pensions, plan the order carefully. The DB commutation is often less flexible (one-time choice at retirement), so consider how much LSA you'll need for your DC pots.

Practical Strategies to Make the Most of Your LSA

1. Know your number

Before taking any tax-free cash, add up all previous tax-free lump sums you've received since 6 April 2024. Your pension providers should be able to confirm how much LSA you've used. If you took tax-free cash before April 2024, transitional rules determine how much of your LSA was "used up" — ask your provider for a statement.

2. Prioritise higher-value pots

If you have multiple pensions and won't use your full LSA, consider which pots benefit most from the 25% tax-free treatment. Generally, it's most efficient to take tax-free cash from your largest pots first, as the absolute amount is higher.

3. Consider drawdown over lump sums

If you've used your LSA, taking further pension income through drawdown doesn't trigger additional LSA usage. You'll pay income tax on drawdown withdrawals, but you can manage the tax efficiently by spreading withdrawals across tax years.

4. Use small pots separately

If you have old, small pensions worth £10,000 or less, cash them in using the small pots rule. They won't touch your LSA and can be a clean way to consolidate without wasting allowance.

5. Plan across tax years

You don't have to take your tax-free cash all at once. Spreading lump sums across multiple tax years doesn't save LSA (the lifetime limit is the same), but it can help you manage the taxable portions more effectively if you're also taking UFPLS payments.

How This Connects to the April 2027 IHT Changes

From April 2027, pensions will be included in your estate for inheritance tax purposes. This makes the LSDBA even more important for estate planning.

Currently, unused pension funds passed on after death can often be received tax-free (if you die before 75) or taxed only as income (after 75). Post-2027, large pension pots may also attract 40% inheritance tax on top.

If you're weighing up whether to take your tax-free lump sum now or leave it in your pension, the IHT changes add a new dimension. Taking tax-free cash and spending or gifting it could reduce your estate's IHT exposure — though you'd lose the pension's investment growth and income tax wrapper.

Read our full guide: Pension Inheritance Tax 2027: What's Changing and How to Prepare.

Check Your Retirement Picture

The lump sum allowance is one piece of a larger puzzle. How much tax-free cash you take, when you take it, and how you draw the rest of your pension all affect your retirement income.

Use the free PoundSense pension calculator to see how your pension pots, state pension, and withdrawal strategy fit together — so you can plan your tax-free cash with confidence.

Frequently Asked Questions

Is the £268,275 limit per pension or per person?

Per person. It's a lifetime limit across all your pensions combined, not per scheme.

Will the lump sum allowance increase?

There's no confirmed plan to increase the LSA. Unlike the old lifetime allowance, which was periodically adjusted, the LSA has remained at £268,275 since its introduction in April 2024. It may be reviewed in future Budgets, but don't count on it.

Do I need to report my LSA usage to HMRC?

No — your pension providers handle this. Each time you take a tax-free lump sum, your provider records it and issues a statement showing how much LSA you've used. If you have multiple providers, it's your responsibility to ensure the total doesn't exceed the limit, so keep your own records too.

What if I've already taken tax-free cash before April 2024?

Transitional rules apply. Tax-free lump sums taken before 6 April 2024 are converted into LSA usage based on the proportion of lifetime allowance they represented. Your provider can calculate this, or you can ask a financial adviser to review your position.