Tax-free cash and the Budget: what the numbers show

The Autumn Budget is on 28 October 2026 (see the Budget 2026 hub). Ahead of a Budget, clients ask whether to take their tax-free cash first. Whether that suits a particular client depends on their circumstances, and this page does not answer it. It does not predict the Budget either. It sets out what the law says today, works the lump sum allowance arithmetic through the engine, and lists what taking the cash does and does not change.

What the law says today

Since 6 April 2024 tax-free cash has had a lifetime ceiling of its own, the lump sum allowance: £268,275 as standard, unless the member has a protected right to a higher one (PTM171000). Three payments use it up: a pension commencement lump sum, the tax-free part of an uncrystallised funds pension lump sum, and a stand-alone lump sum. It is one running total per member across all their pensions. It is a fixed amount in the legislation: it does not rise with inflation and it does not reset at the start of a tax year.

The allowance is not the only limit. A pension commencement lump sum is capped at the permitted maximum, the lower of three amounts: the applicable amount, which is 25% of the capital value of the benefits coming into payment; the member's available lump sum allowance; and their available lump sum and death benefit allowance, £1,073,100 as standard (PTM063230). When uncrystallised funds go into drawdown, the applicable amount works out as a quarter of the funds used: a third of the amount designated for drawdown (PTM063240). Any amount above the lump sum allowance is not tax-free: it is taxed at the member's marginal rate (PTM171000). A member who crystallised benefits before April 2024, or who holds a protection, starts from a different figure; that is covered in the lump sum allowance explainer, and how the two allowances fit together is in LSA vs LSDBA.

PTM171000 · PTM063230 · PTM063240 · FA 2024 Sch 9

A worked example: the same funds, phased or at once

Take a member with no protection, no benefits crystallised before April 2024 and no tax-free cash taken since. They hold £1,400,000 of uncrystallised money purchase funds. On the first route they crystallise £600,000 now and the other £800,000 later; on the second they crystallise all of it at once. Each time the lump sum asked for is a quarter of the funds used. Fund values are held constant to keep the arithmetic visible; in practice the quarter follows the value on the day.

On both routes £268,275 is paid tax-free and £81,725 of the quarter is above the allowance. The allowance is a lifetime total, so the order and timing of the crystallisations move where it is used up, not how much of it there is. The part above the allowance is not tax-free cash. If the scheme's rules allow, it can be paid as a pension commencement excess lump sum, taxed as the member's pension income at their marginal rate in the year of payment; otherwise it stays invested to be drawn as income. The lump sum allowance calculator runs the same engine on your own figures.

PTM063240 · PTM171000 · PTM177000 — figures engine-computed against the 2026/27 config

What taking the cash changes, and what it does not

It does not change the allowance or the permitted maximum: the same rules apply to a lump sum whenever it is paid, under the law in force at the time. What it changes is where the money is held. The lump sum leaves the pension and becomes part of the member's own assets. Once outside the pension, any income or gains it produces are taxed in the ordinary way. The rest of the funds crystallised alongside it stay in the pension, for example in drawdown, and withdrawals from them are taxed as income. Taking the lump sum on its own does not trigger the money purchase annual allowance; the first payment of income from a flexi-access drawdown fund does (PTM056520).

For inheritance tax, Finance Act 2026 brings most unused pension funds and pension death benefits into a person's estate for deaths on or after 6 April 2027. Money taken out of the pension and still held at death is part of the estate in the ordinary way. The income-tax rules on pension death benefits, which turn on whether the member dies before or after 75, apply to money still in the pension. The detail is in pensions and inheritance tax from April 2027.

PTM056520 · Finance Act 2026 · HMRC “Inheritance Tax on pensions” technical note · Inheritance Tax Act 1984 s.5 (the estate)

A paid lump sum cannot be undone

In December 2024 HMRC set out the position for members who ask to return a lump sum they have taken:

HMRC repeated the point in September 2025: the tax consequences of a paid lump sum, including the lump sum allowance and lump sum and death benefit allowance it used, cannot be undone, even if the payment is returned or cancellation rights are exercised. Paying the money into a pension again is a fresh contribution, and where the recycling conditions are met unauthorised payments charges may apply; see the pension recycling rules.

HMRC Pension schemes newsletter 165 · HMRC Pension schemes newsletter 173

What a Budget can change

A Budget can propose changes to pension tax, and what it changes is known only when it is announced and the Budget documents are published. This page describes the rules in force on the date it was reviewed, and it will be reviewed again after 28 October 2026. ParaplanAI adds new figures only once they are confirmed. For planning and illustration only; this page describes the law and is not tax or financial advice.

Chancellor’s letter to the Treasury Select Committee, 31 July 2026