Can I Take 25% of My Pension Tax-Free Every Year?

Thinking about taking 25% of your pension tax-free each year? Learn how tax-free pension withdrawals work, the rules, and the risks before making a decision.

When it comes to pensions, one of the biggest perks is the 25% tax-free lump sum that you can withdraw once you reach retirement age. But many people wonder: Can I take 25% of my pension tax-free every year, or is it a one-time deal?

The short answer is: You can take your tax-free lump sum in different ways, but you can’t take 25% tax-free every single year indefinitely. However, depending on how you access your pension, you can spread out your tax-free withdrawals over time—but there are important rules and tax implications to consider. Let’s break it down so you can make an informed decision.

How Does the 25% Tax-Free Pension Lump Sum Work?

Once you reach 55 (rising to 57 in 2028), you can start accessing your Defined Contribution pension. The government allows you to take up to 25% of your total pension pot tax-free, but the way you take it depends on your withdrawal strategy.

There are two main ways you can access your tax-free pension money:

1. Taking a Single 25% Tax-Free Lump Sum

The traditional approach is to take the full 25% tax-free amount all at once when you start withdrawing from your pension. After that, any further withdrawals are subject to income tax at your marginal rate.

For example, if you have a £200,000 pension pot, you can withdraw £50,000 tax-free in one go. After that, the remaining £150,000 is fully taxable when withdrawn.

2. Taking 25% Tax-Free in Smaller Withdrawals Over Time

Rather than withdrawing all of your tax-free amount at once, you can take smaller withdrawals, where each withdrawal is 25% tax-free, and the rest is taxed.

This is known as "partial pension drawdown" or "UFPLS" (Uncrystallised Funds Pension Lump Sum)." It allows you to take a portion of your pension each year, with 25% of that withdrawal tax-free, and the remaining 75% taxed as income.

For example, if you have a £200,000 pension and want to withdraw £10,000 per year, then £2,500 of that amount would be tax-free, while the remaining £7,500 would be subject to income tax.

Can You Keep Taking 25% Tax-Free Every Year?

No, you cannot keep taking 25% of your pension tax-free every single year indefinitely.

The 25% tax-free rule applies to your total pension pot, not each withdrawal. Once you have withdrawn your full 25% tax-free entitlement, any further withdrawals from your pension will be taxed.

If you choose to take your pension gradually using the partial drawdown method, it allows you to spread out the tax-free benefit over several years, but you will still only ever receive 25% of your total pension tax-free in total.

What Are the Pros and Cons of Taking Your Tax-Free Pension in Stages?

Advantages

  • Spreads out tax-free benefits – Instead of taking a large lump sum, which might be unnecessary, you can take smaller, tax-free withdrawals over time.

  • Reduces income tax liability – Since only 75% of each withdrawal is taxable, spreading it out may prevent you from moving into a higher tax bracket.

  • Keeps more money invested – The remainder of your pension stays invested, potentially growing over time.

Disadvantages

  • More complex to manage – You need to carefully plan withdrawals to avoid unexpected tax bills.

  • Market risks – Keeping money invested means it is exposed to market fluctuations.

  • Limits on further pension contributions – If you start withdrawing from your pension while still working, you may trigger the Money Purchase Annual Allowance (MPAA), which limits how much you can contribute to your pension tax-free.

What Happens After You’ve Used Your 25% Tax-Free Allowance?

Once you have withdrawn your full 25% tax-free entitlement, any further withdrawals will be taxed as income. This means that if you take large withdrawals in any given year, you might end up paying a higher rate of income tax than expected.

For example:

  • If your taxable pension withdrawal keeps you within the basic-rate tax band (20%), your tax bill will be relatively low.

  • If your withdrawals push you into the higher-rate (40%) or additional-rate (45%) tax band, you’ll pay significantly more tax.

To minimise tax liability, many people choose to:

  • Withdraw only enough to stay within the basic-rate tax band.

  • Use other savings or ISAs to supplement income.

  • Take smaller withdrawals over multiple years instead of large lump sums.

Alternative Ways to Take Your Pension Tax-Efficiently

If you want to reduce your tax bill while accessing your pension, consider the following strategies:

  • Use ISAs alongside your pension – ISA withdrawals are completely tax-free, so combining them with pension income can help minimise tax.

  • Delay pension withdrawals – The longer you leave your pension invested, the more time it has to grow.

  • Consider an annuity – Buying an annuity with part of your pension can provide a guaranteed income for life.

  • Plan withdrawals carefully – Working with a financial adviser can help you structure withdrawals efficiently to minimise tax.

Final Verdict: Can You Take 25% of Your Pension Tax-Free Every Year?

While you cannot take 25% of your pension tax-free every year indefinitely, you can spread out your tax-free allowance over multiple withdrawals if you use the partial drawdown method. The key takeaway is that the 25% tax-free allowance is based on your total pension pot, not an annual entitlement. Once you have used your full 25%, any further withdrawals will be taxed as income.

If you want to manage your pension withdrawals tax-efficiently, consider spreading them out over time, using other savings, and seeking financial advice to avoid unnecessary tax charges. Planning your withdrawals wisely can help you make the most of your pension savings while keeping as much of your money as possible in your pocket.