If you hold a private pension in the UK, the rules around getting your money out are going through their biggest shake-up in a decade. The age at which you can first touch your pot is rising, the tax-free treatment of untouched pensions on death is ending, and the allowances that shape every withdrawal decision have already been overhauled once this decade. Some of these changes are already in force; others take effect in 2027 and 2028 — and knowing which is which could save you thousands of pounds.
How pension withdrawals work today
The starting point is the pension freedoms, introduced in April 2015. They gave anyone aged 55 or over (currently) the right to access their defined contribution pension — workplace, personal, or SIPP — however they like, rather than being forced to buy an annuity. You can take the whole pot at once, draw an income from it while it stays invested, take lump sums as and when you need them, or mix the approaches.
The single most valuable feature of the system is the 25% tax-free lump sum — formally called the pension commencement lump sum (PCLS). Up to a quarter of each private pension can be taken free of income tax. The lifetime allowance, which used to cap total pension savings at £1,073,100, was abolished in the 2024/25 tax year, but the tax-free cash is still capped: no more than £268,275 can be taken tax-free across all your pensions in your lifetime (some people with historical protections have higher caps). Everything beyond the 25% is taxed as income at your marginal rate when you withdraw it.
Flexi-access drawdown
With drawdown, you move some or all of your pot into a fund that stays invested — typically in shares, bonds, and funds — and withdraw income from it whenever you choose: monthly, annually, or as ad-hoc lump sums. You usually take your 25% tax-free cash first, and the rest keeps its potential to grow. The trade-off is that the money can also shrink: there is no guarantee it will last as long as you do.
Drawdown suits people who want flexibility — varying their income year to year, keeping the pot invested, or drawing a little while still working.
Lifetime annuity
An annuity is the opposite deal: you hand some or all of your pot to an insurance company, which pays you a guaranteed income for the rest of your life (or for a fixed term, if you prefer). You can still take your 25% tax-free cash before buying; the annuity payments themselves are taxed as income. Once purchased, an annuity is generally irreversible. For that you get certainty: the income keeps arriving no matter how long you live. Joint-life annuities keep paying a surviving partner, and guarantee periods can protect a set number of payments for a beneficiary.
Many people use a mix — an annuity to cover essential spending, with drawdown on the rest for flexibility.
UFPLS and cashing in the whole pot
A third route is the uncrystallised funds pension lump sum (UFPLS): individual lump sums taken directly from the untouched pot, with 25% of each payment tax-free and 75% taxed as income. It is a simple way to take irregular amounts while the rest stays invested, and it is often used to spread withdrawals across tax years.
You can also cash in the entire pot in one go. For large pots this is usually a poor idea, because the taxable chunk is added to your income for that year and can push much of it into the higher (40%) or additional (45%) rate bands. As the examples below show, timing and spreading matter.
Rule change 1: the minimum pension age rises to 57 on 6 April 2028
The normal minimum pension age (NMPA) — the earliest age you can normally access a private pension — is currently 55. It will rise to 57 on 6 April 2028, under legislation passed in the Finance Act 2022. The government raised it to coincide with the rise of the State Pension age to 67, reflecting longer life expectancies.
Who is affected depends on your date of birth:
- Born before 6 April 1971: unaffected — you will already be 57 by April 2028.
- Born between 6 April 1971 and 5 April 1973: transitional. You can still access benefits from your 55th birthday up to 5 April 2028, but after that you can generally only continue benefits you have already started — no new withdrawals until you turn 57.
- Born on or after 6 April 1973: you will have to wait until age 57, unless an exception applies.
There are important exceptions. Ill health: the age at which benefits can be paid on genuine ill-health grounds is unchanged. Protected pension ages: some people whose scheme rules gave them an unqualified right to take benefits early (as at 4 November 2021) keep that earlier age — though transferring the pension elsewhere can lose the protection, so check before consolidating. Members of the armed forces, police, and firefighters’ public service schemes are exempt from the increase entirely.
Note that this is separate from the State Pension, which has its own qualifying age. Private pension access age and State Pension age are set independently — see our guide on getting a State Pension forecast to work out what the state will pay you and when.
Rule change 2: inheritance tax on unused pensions from 6 April 2027
This is the most consequential change. Announced in the Autumn Budget 2024 and detailed in draft legislation during 2025 (expected to be enacted in the Finance Bill 2025-26), it will bring most unused pension funds and death benefits into the scope of inheritance tax (IHT) from 6 April 2027.
Under current rules, pension pots sit entirely outside your estate for IHT purposes, however large they are. That made pensions one of the most powerful inheritance-planning tools in the UK: many people deliberately spent other assets first and left their pension untouched to pass to their family tax-free. From April 2027, that advantage disappears. Any unspent pension savings at death will be added to the value of the estate, and IHT at 40% will apply to the portion above the available nil-rate bands.
Key details confirmed by GOV.UK:
- Most unused defined contribution pots — SIPPs, personal pensions, workplace pots, and uncrystallised funds — will count toward the estate, whether or not the owner had started drawing income.
- Most lump-sum death benefits will also be included, including lump sums from defined benefit arrangements.
- Exclusions: transfers to a spouse or civil partner remain exempt; death-in-service benefits from a registered pension scheme are excluded; continuing annuities and dependants’ scheme pensions with no capital value stay outside the net.
- Personal representatives (executors) will be liable for reporting the pension assets to HMRC and paying any IHT due, and will be able to direct pension administrators to withhold funds and pay the tax before releasing benefits.
The government estimates that around 10,500 more estates will become liable for IHT in 2027/28 as a result, raising £1.46 billion a year by 2030. The nil-rate band stays frozen at £325,000 and the residence nil-rate band at £175,000 until at least April 2031 — so with rising asset values, more families will drift into the net.
This change has already altered behaviour: uncertainty over the new treatment has contributed to a surge in withdrawals ahead of 2027. Whether withdrawing early is right for you depends on your tax position — taking money out early means paying income tax now to save IHT later, which only makes sense in some circumstances. Because the interaction with other estate planning is complex, review this alongside the standard toolkit — including the UK rules on gifting to reduce inheritance tax, which still apply in the usual way.
The allowances that shape every withdrawal decision
Beyond the headline changes, three allowances quietly determine how much of your pension survives tax — and getting any of them wrong is expensive.
1. The annual allowance: £60,000. This is the total that can be contributed across all your registered pensions in a tax year — your contributions, your employer’s, and any third-party top-ups — while still benefiting from tax relief. It was raised from £40,000 in April 2023 and is unchanged for 2026/27. Exceed it and the excess is added to your taxable income via an annual allowance charge. Two wrinkles: your personal contributions only get tax relief up to 100% of your relevant UK earnings (minimum £3,600 gross), and you can carry forward unused allowance from the three previous tax years if you have the earnings to support it.
2. The money purchase annual allowance (MPAA): £10,000. Once you flexibly access a defined contribution pension — for example, by taking income from drawdown beyond the tax-free lump sum, taking a UFPLS, or starting a flexible annuity — your future DC contribution allowance collapses from £60,000 to £10,000, permanently. It was raised from £4,000 in April 2023 and is unchanged for 2026/27. You cannot use carry forward against the MPAA.
3. The tapered annual allowance. High earners face a reduced allowance: once adjusted income exceeds £260,000, the £60,000 allowance falls by £1 for every £2 of excess, down to a floor of £10,000. It only bites when threshold income is also above £200,000.
Keep these in mind alongside the wider picture: pensions are usually the most tax-efficient way to build retirement wealth, but they sit alongside other tax-efficient wrappers. If you are weighing where to put extra savings, our guide on how many ISAs you can have explains the other major tax-free option for UK savers.
Worked examples: what the tax actually looks like
All examples use 2026/27 income tax bands: personal allowance £12,570 (0%), basic rate 20% on £12,571–£50,270, higher rate 40% on £50,271–£125,140, and additional rate 45% above £125,140. Each example assumes no other income and that the full personal allowance is available.
Example 1: cashing in a £40,000 pot in one go. The 25% tax-free lump sum is £10,000. The remaining £30,000 is taxable. The first £12,570 is covered by the personal allowance (£0 tax); the other £17,430 is taxed at 20% (£3,486). Total received: £36,514. Note the MPAA: having flexibly accessed the pot, future DC contributions are now capped at £10,000 a year.
Example 2: £120,000 pot cashed in a single year — the expensive version. Tax-free cash: £30,000. Taxable: £90,000. Tax on that: £0 on the first £12,570; 20% on £37,700 (£7,540); 40% on the remaining £39,730 (£15,892). Total tax: £23,432, leaving £96,568. Nearly a quarter of the pot goes to HMRC — purely because it was all taken in one tax year.
Example 3: the same £120,000 via UFPLS spread over three tax years. Withdraw £40,000 each year and each year’s tax is £3,486 — the same maths as Example 1. Over three years: £10,458 total tax, £109,542 received. That is £12,974 more in your pocket than the single-year cash-in, for the identical pot. Spreading withdrawals across tax years is one of the simplest legal ways to cut the tax bill.
Example 4: the 2027 IHT change in numbers. Imagine an estate worth £700,000 at death, including a £200,000 unused pension. Under current rules the pension is ignored, so the taxable estate is £500,000. From April 2027, the taxable estate is the full £700,000. With the £325,000 nil-rate band plus a £175,000 residence nil-rate band (assuming it applies), the taxable excess is £200,000 — and IHT at 40% is £80,000 that would not have existed before the change.
Common mistakes to avoid
- Triggering the MPAA by accident. The classic trap: dipping into drawdown income in your late 50s — perhaps to tide yourself over — then returning to work and discovering your pension contribution allowance has permanently dropped from £60,000 to £10,000. Taking only the 25% tax-free lump sum does not trigger the MPAA; taking taxable income does. If you trigger it, you must tell your pension providers within 91 days.
- Being overtaxed on your first withdrawal. Providers usually apply an emergency tax code on a Month 1 basis to the first flexible withdrawal, because they have no current tax code from HMRC. HMRC treats the payment as though you will take the same amount every month, pushing it into higher bands. Reclaim with form P55 (partial withdrawal), P53Z (full withdrawal, other income continues), or P50Z (full withdrawal, no other income) — HMRC usually repays within about 30 days.
- Cashing in too much in one tax year. As Example 2 shows, a single-year cash-in can hand a huge slice to HMRC. Unless you need the money immediately, phasing withdrawals across tax years keeps more of each payment inside the personal allowance and basic-rate band.
- Assuming pensions are still IHT-free. If your plan was “spend everything else, leave the pension to the kids tax-free”, that strategy dies on 6 April 2027. Review beneficiary nominations and the balance between pension and other assets before then.
- Taking 25% cash just because you can. The tax-free lump sum is tempting at 55 (57 from 2028), but money left in the pension keeps its tax-advantaged growth. Take it when you have a use for it, not simply because the calendar says you can.
- Forgetting the £268,275 cap. If your combined pensions are large, the 25% tax-free amount stops at £268,275 in your lifetime (unless you hold historical protection). Plan withdrawals across all pots together, not one pot at a time.
Practical next steps
If retirement is more than a few years away, the priority is simple: keep contributing while the tax relief is generous, and do not let the 2028 age rise catch you unprepared if you had planned to access your pension at 55. If you were born after early April 1973, your earliest access date is now 57 — rebuild any bridging plan around that.
If retirement is close, do three things. First, check your exact access age — including any protected pension age your scheme may hold. Second, model your withdrawals across tax years rather than defaulting to a single lump sum; the examples above show how much timing is worth. Third, if your estate — including your pension — is likely to exceed £325,000 (or £500,000 with the residence nil-rate band), get your estate plan reviewed before April 2027. And as always, start with the big question first: how much money you actually need to retire.
Free, impartial guidance is available from Pension Wise, the government’s service for people aged 50 and over with a defined contribution pension. For large sums, irreversible decisions like buying an annuity, or the interaction of pensions with inheritance tax, regulated financial advice is money well spent.
This article is for general information only and is not financial advice. Tax rules and allowances can change; the figures used reflect the 2026/27 tax year and legislation announced up to October 2026. Consider taking independent financial advice before making decisions about your pension.
