How Much of My SIPP Is Tax-Free? The 25% Lump Sum Explained

By Team SalaryCalculate · 7/10/2025

One of the most appealing features of a Self-Invested Personal Pension (SIPP) is the ability to take part of your pension pot tax-free. But how much can you take, when can you take it, and how does it affect the rest of your retirement income? This guide explains the rules around the 25% tax-free lump sum and your options for accessing it.

How Much of Your SIPP Is Tax-Free?

You can usually take up to 25% of your total pension pot as a tax-free lump sum. This is often called the Pension Commencement Lump Sum (PCLS).

Example:

Pension pot: £200,000
Tax-free amount: £50,000 (25%)

The remaining 75% will be taxed as income when you withdraw it.

When Can You Take the 25% Lump Sum?

You can access your tax-free lump sum from age 55 (rising to 57 in April 2028) as long as you’ve reached the normal minimum pension age.

You don’t have to take it all at once. You can:

Take the full 25% upfront
Take it in stages through phased drawdown
Combine it with taxable income via Uncrystallised Funds Pension Lump Sums (UFPLS)

Tax-Free Lump Sum vs Phased Access

There are two main ways to access your 25% tax-free cash:

1. Take 25% of your whole pot upfront

Useful for paying off a mortgage, gifting, or major purchases
The remaining 75% goes into drawdown (taxable when accessed)

2. Take 25% of each withdrawal as you go

Ideal if you don’t need all the tax-free cash at once
Helps manage tax liabilities by spreading income

Limits on the Tax-Free Lump Sum

There is now a maximum tax-free cash cap of £268,275 (as of 2024/25), unless you hold lifetime allowance protection.

This means:

Even if your pension exceeds £1,073,100, you can only take £268,275 tax-free
If you had LTA protection, you may be able to take more

More info: GOV.UK – Lifetime allowance change

Is the Tax-Free Lump Sum Really Tax-Free?

Yes — the 25% is free from income tax.

However:

Taking large sums could affect entitlement to means-tested benefits
Any income or withdrawals beyond the 25% will be taxed at your marginal rate
Taking income triggers the Money Purchase Annual Allowance (MPAA) of £10,000/year for future contributions

Example: Tax-Free Lump Sum in Action

Jane, age 57, has a £160,000 SIPP

She takes £40,000 (25%) tax-free
The remaining £120,000 goes into drawdown
She withdraws £20,000/year from drawdown, taxed as income

Can You Pass on Tax-Free Lump Sum if You Die?

If you die before age 75 and haven’t taken your tax-free cash, your beneficiaries can often receive your pension tax-free.

If you die after 75, they will pay income tax on withdrawals, but there is no inheritance tax.

See: What Happens to Your SIPP When You Die?

Summary

You can usually take 25% of your SIPP tax-free from age 55, either all at once or gradually. This tax-free cash is a valuable planning tool — but how and when you take it can have lasting effects on your overall tax position and retirement income. Make sure to understand your options and plan withdrawals carefully.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Speak to a qualified adviser before making pension decisions.