Can I Take 25 Percent of My Pension Tax Free Every Year

At Towerstone, we specialise in higher rate pension tax relief advice and have written this article for people planning pension withdrawals. The purpose of this article is to explain how the 25 percent tax free element works, helping you make informed decisions.

This is one of the most common pension questions I am asked and in my opinion it is also one of the most misunderstood. The idea that you can take 25 percent of your pension tax free sounds incredibly generous and it is. However, many people then make a leap and assume they can take 25 percent every year without tax.

From experience, that assumption leads to disappointment, confusion, and sometimes costly mistakes.

The short answer is no, you cannot usually take 25 percent of your pension tax free every year in the way most people imagine. The longer answer is far more interesting and far more useful because there are ways to access tax free cash gradually, but they work very differently to what people expect.

In this guide, I will explain exactly how the 25 percent tax free pension rule works in the UK, what you can and cannot do, how different pension options affect tax free cash, and how people sensibly structure withdrawals in practice. I will also share common mistakes I see and what I believe people should understand before touching their pension.

The Basic Rule on Tax Free Pension Cash

Under current UK pension rules, most people can take up to 25 percent of their pension value tax free.

This is often called:

Tax free cash

Pension commencement lump sum

This rule applies to most defined contribution pensions and many defined benefit pensions.

However, and this is the key point, the 25 percent is a lifetime proportion, not a yearly entitlement.

From experience, this distinction is where most confusion starts.

What the 25 Percent Actually Means

The 25 percent tax free amount is calculated based on the value of the pension funds you crystallise.

Crystallisation is the point at which pension benefits are moved from the untouched stage into payment.

Once pension funds are crystallised:

Up to 25 percent of that amount can be taken tax free

The remaining 75 percent becomes taxable when withdrawn

You do not get a fresh 25 percent allowance each year on the same money.

In my opinion, thinking of the 25 percent as a pot rather than an annual allowance makes things much clearer.

Why People Think It Is Per Year

From experience, people often think the 25 percent is annual because:

Withdrawals are taken annually

Pension income feels like salary

Tax free allowances elsewhere reset each year

The phrase “25 percent tax free” is repeated without context

Unfortunately, pensions do not work like ISAs or income tax allowances.

Once you have used the 25 percent on a given slice of pension, it is gone.

How You Can Take Tax Free Cash in Practice

There are different ways to access pension benefits and the way you do it affects how and when you get tax free cash.

The main options are:

Taking a single lump sum

Using flexi access drawdown

Taking uncrystallised funds pension lump sums

Each works differently.

Taking a Single Lump Sum

This is the simplest and most traditional option.

You crystallise the whole pension pot at once.

At that point:

Up to 25 percent is taken tax free

The remaining 75 percent is taxable when withdrawn

You cannot take further tax free cash from that pot

For example:

Pension pot £200,000

Tax free cash £50,000

Remaining £150,000 taxable

From experience, this is often chosen by people who want a large lump sum at retirement.

However, it clearly does not allow 25 percent tax free every year.

Flexi Access Drawdown Explained

Flexi access drawdown is where most of the confusion and flexibility sits.

With drawdown:

You move part or all of your pension into drawdown

You can take up to 25 percent of the amount you crystallise tax free

The rest stays invested

You draw income as and when needed

Crucially, you do not have to crystallise the whole pot at once.

Phased Drawdown and Tax Free Cash

This is where the idea of taking tax free cash gradually comes from.

Instead of crystallising the whole pension, you can crystallise it in stages.

Each time you crystallise a portion:

25 percent of that portion can be taken tax free

75 percent is designated for taxable income

For example:

Pension pot £300,000

You crystallise £40,000 this year

£10,000 tax free

£30,000 goes into drawdown

Next year, you crystallise another £40,000:

£10,000 tax free

£30,000 taxable

In this way, you are taking tax free cash over multiple years.

However, and this is vital, you are still only ever taking 25 percent of each crystallised slice, not 25 percent of the whole pot each year.

From experience, this is often the most sensible way to use tax free cash, but it requires careful planning.

Uncrystallised Funds Pension Lump Sums

Another option is taking what is known as an uncrystallised funds pension lump sum, often shortened to UFPLS.

With UFPLS:

Each lump sum is treated as partly tax free and partly taxable

25 percent of each lump sum is tax free

75 percent is taxed as income

For example:

You take £20,000

£5,000 tax free

£15,000 taxable

This can feel like taking 25 percent tax free each time you withdraw money.

However, again, it is not 25 percent of the whole pension every year. It is 25 percent of each withdrawal and over time you will still only receive 25 percent of the pension tax free overall.

From experience, UFPLS suits people who want simple ad hoc withdrawals but it can be tax inefficient if not managed carefully.

The Lifetime Limit on Tax Free Cash

Another important point that is often missed is that tax free cash is also subject to overall limits.

Although the lifetime allowance charge has been removed, there are still limits on the amount of tax free cash you can take.

In broad terms:

Tax free cash is limited to 25 percent of the total pension value crystallised

Very large pensions may face additional restrictions

From experience, most people will not hit these limits, but it is important to understand that tax free cash is not unlimited.

Why You Cannot Take 25 Percent Every Year Forever

Let me explain this in practical terms.

Imagine you have a pension of £200,000.

If you could take 25 percent every year tax free, you would take:

£50,000 year one

£50,000 year two

£50,000 year three

£50,000 year four

That would be £200,000 tax free.

That is not how the system works.

The tax free element is capped at 25 percent of the pension value, not reset annually.

From experience, this is the single misunderstanding that leads to poor retirement income planning.

What Happens Once the 25 Percent Is Used

Once the full 25 percent tax free entitlement has been used:

All further withdrawals are taxable

Income tax applies at your marginal rate

The pension still offers flexibility but not tax free cash

This does not mean pensions stop being useful, but the nature of withdrawals changes.

How Tax Planning Fits Into This

In my opinion, the real value of the 25 percent rule is not in taking as much as possible as quickly as possible.

It is in using it strategically.

Common strategies include:

Using phased drawdown to spread tax free cash

Keeping taxable income within lower tax bands

Coordinating pension withdrawals with other income

Preserving pension funds as long as possible

From experience, people who rush to take all tax free cash often regret it later.

The Interaction With Income Tax

Remember that the taxable part of pension withdrawals is added to your other income.

This means:

State pension

Employment income

Rental income

Investment income

all stack together.

Using tax free cash carefully can help avoid pushing income into higher tax bands.

In my opinion, this is where professional advice often pays for itself.

Defined Benefit Pensions and Tax Free Cash

Defined benefit pensions work slightly differently.

Tax free cash is usually calculated as:

A multiple of pension income

Often by giving up part of the pension

You cannot usually take 25 percent every year.

Instead:

You take tax free cash at retirement

Your annual pension is permanently reduced

From experience, people often underestimate the long term impact of taking maximum tax free cash from defined benefit schemes.

Common Mistakes I See

From experience, the most common mistakes include:

Assuming 25 percent resets every year

Taking large lump sums without tax planning

Triggering unnecessary income tax

Using UFPLS without understanding marginal rates

Spending tax free cash too quickly

Ignoring long term income needs

Most of these mistakes are avoidable with basic understanding.

What Happens If You Keep Working?

If you access taxable pension income while still working:

You may trigger the money purchase annual allowance

This can reduce how much you can contribute tax efficiently in future

Taking only tax free cash does not usually trigger this, but taking taxable income does.

From experience, this catches people out who plan to phase retirement.

My Honest View From Experience

In my opinion, the question “can I take 25 percent of my pension tax free every year” usually reflects a desire for flexibility rather than greed.

People want to access their money sensibly without overpaying tax.

The good news is that the UK pension system does offer flexibility. The bad news is that it is often misunderstood.

The 25 percent rule is generous, but it is not a repeating annual allowance.

What I Advise People to Do

Based on years of experience, my advice is:

Understand that 25 percent is a lifetime proportion

Consider phased drawdown rather than all at once

Avoid UFPLS without tax modelling

Coordinate withdrawals with other income

Think long term rather than year by year

Get clarity before taking anything

In my opinion, pension withdrawals should be planned like an income strategy, not treated as a cash machine.

Where this leaves you

So can you take 25 percent of your pension tax free every year?

No, not in the way most people mean it.

You can take up to 25 percent of the pension amounts you crystallise tax free and you can spread that across years using the right methods. But once that 25 percent has been used, it is gone.

From experience, the people who get the best outcomes are those who understand the rule properly and use it thoughtfully rather than chasing the tax free headline.

Pensions reward patience, planning, and understanding. When used well, the 25 percent tax free element is a powerful tool, but only when you respect its limits.

If you would like to explore related pension guidance, you may find can i use my pension to buy a house and can i view my nhs pension online useful. For broader pension guidance, visit our pensions knowledge hub.