How tax-free cash works today
The old Lifetime Allowance (a limit on the total amount you could have in your pension pot before paying additional tax) no longer applies – it was abolished in 2024. But the amount of tax-free cash available remains capped through two allowances.
Lump sum allowance
The lump sum allowance (LSA) is normally 25% of your pension pot, up to a maximum of £268,275. This is the total amount of tax-free cash you can withdraw. Some people may have a higher lump sum allowance where they hold valid pre-existing protections, such as certain scheme‑specific or historic protections, that are no longer available to new members. You can usually access your private pension at age 55, rising to 57 from April 2028.
Lump sum and death benefit allowance
The lump sum and death benefit allowance is normally £1,073,100 for people without protections. It covers both tax-free lump sums taken during life and certain tax-free death benefits if the person passes away before they’re 75.
Benefits t aken before 6 April 2024 reduce these allowances. Where individuals can show exactly how much tax-free cash they’ve already taken, they can apply for a transitional tax-free amount certificate (TTFAC). If you’ve already accessed your pension pot and taken less than the standard 25% lump sum, this official document ensures you’ll retain the right to take up to 25% of your pension savings tax-free.
It's important to think this through carefully and get professional advice if you need it because once you’ve applied for this and it’s been granted, the TTFAC can’t be revoked.
A major shift around pensions is coming in April 2027
Under the current rules, unused pension funds are generally excluded from inheritance tax. They can accumulate without income tax or capital gains tax, and are often passed on to beneficiaries as part of a legacy plan.
From 6 April 2027, this will change. Most unspent pension funds and death benefits will become part of the estate for inheritance tax calculations. This represents a significant shift from the long-established position that pensions sit outside the inheritance tax system.
What happens when pension benefits pass to a spouse?
Transfers to a spouse are typically exempt from inheritance tax. This will remain the case. The difference is that from 2027, pension values will be counted within the estate and will therefore rely on the spouse exemption, rather than being excluded from the estate altogether.
What these changes mean for your tax-free cash
Tax-free cash may have a more strategic role
With inheritance tax potentially applying to unused pension funds from 6 April 2027, the relative attractiveness of taking tax free cash earlier may increase for some individuals. This is particularly the case where withdrawn funds can be moved into assets or arrangements that fall outside the estate, such as ISAs, lifetime gifts, or certain trust structures.
However, this needs to be balanced against your long term income needs and other factors.
Phased withdrawals still offer useful flexibility
Withdrawals can be taken gradually, in what’s known as ‘phased crystallisation’, with 25% of each portion tax-free. This can help manage annual tax bands, maintain investment exposure and avoid taxable withdrawals in higher income years. However, after April 2027, leaving large sums untouched inside a pension could increase your inheritance tax bill.
The way you use your lump sum allowance is increasingly important
The LSA is a lifetime limit. Once used, it can’t be restored. Using it gradually can help support long-term planning, but underusing it could mean missing opportunities to reduce the value of your estate over time . Using too much too soon could reduce flexibility later in life.
Pensions remain attractive for investment growth
Even after the changes in April 2027, pensions will continue to offer important benefits. Investments can grow free of UK income tax and capital gains tax, contributions may receive tax relief, and pensions remain a relatively flexible and tax-efficient vehicle for retirement income .
However, they may no longer be the most inheritance tax efficient asset to leave untouched for the next generation, given that unused pension funds will form part of people’s estates for inheritance tax purposes in the future.
Revisiting your withdrawal strategy
The coming years provide a valuable opportunity to review how best to sequence pension withdrawals, how much tax-free cash to access, and when. Decisions may benefit from careful consideration and planning, and the right approach depends on your tax position, liquidity needs, family objectives and wider estate planning strategy.
Future-proofing your tax-free cash today
Tax-free cash remains a core feature of pension and estate planning, but the context is changing. With pension funds set to fall within the inheritance tax estate from April 2027, decisions that once appeared straightforward may now benefit from careful thought.
Reviewing your approach early can help reduce your tax and compound your long-term wealth, while maintaining financial flexibility. Reach out to your usual Rathbones contact or fill out our enquiry form below to get in touch. We’re here to help.
