UK Pension Tax-Free Lump Sum: How the 25% Allowance Works for Expats

The key consideration is tax efficiency: how to structure lump sum access to minimise liability across jurisdictions while drawing a UK pension abroad.

This article will explain how UK expats can access their pension tax-free lump sum effectively, outline the UK and overseas tax implications of lump sum withdrawals, and provide high-level, practical considerations for reducing taxation and maximising retirement income in line with current UK rules and double tax treaty principles.

How Does a Tax-Free Lump Sum Pension Withdrawal Work in the UK?

Individuals with accrued benefits in a UK-based pension scheme can ordinarily withdraw up to 25% of their pension value as a tax-free lump sum once they reach age 55 (rising to 57 on 6 April 2028, unless they hold a protected lower pension age).

The tax-free lump sum, known as the pension commencement lump sum (PCLS), is capped at £268,275. This threshold, known as the lump sum allowance (LSA), applies across all your UK pensions combined. Consequently, the maximum amount of tax-free lump sum you can receive is £268,275, regardless of the number of UK pension arrangements you hold, unless you are entitled to protected tax-free cash under specific HMRC protections or scheme rules.

Any amount you try to withdraw as a tax-free lump sum above your remaining LSA is treated as taxable pension income under UK rules and taxed at your marginal rate. Your tax-free personal allowance may still offset some or all of that taxable amount, depending on your total income in the tax year and whether UK tax applies under your residence and treaty position.

The LSA is the standard 25% of the total lump sum and death benefit allowance (LSDBA), which currently amounts to £1,073,100, though both allowances may be higher where valid protections apply.

If you pass away before age 75, your beneficiaries can generally receive pension death benefits free of income tax, subject to the type of benefit paid, the timing of payment or designation, and (for certain lump sums) your available LSDBA. However, the funds will typically be taxed as income at your beneficiaries’ marginal rate where death occurs at or after age 75.

Under specific circumstances, you may be able to withdraw your entire pension pot as a tax-free lump sum, an arrangement known as the serious ill-health lump sum (SIHLS). SIHLS provisions apply if you meet all of the following conditions:

1. You are under the age of 75.
2. The payment is made from uncrystallised pension rights and extinguishes those rights under the relevant arrangement.
3. The payment does not exceed your available LSDBA threshold.
4. A registered medical practitioner has confirmed that your life expectancy is less than 12 months.
5. Any excess above the permitted maximum, or payments made at age 75 or over, are generally taxed as pension income.

What Are the Specific Rules for Receiving a 25% Tax-Free Pension Lump Sum?

You may take the 25% tax-free lump sum from two types of UK-based pension schemes registered with HMRC:

Both DB and DC pension holders are allowed to take a tax-free lump sum, although the exact rules differ based on the type of pension scheme you own and the scheme’s own governing rules.

Defined Contribution Pension Tax-Free Lump Sum

You may typically take up to 25% of your defined contribution (DC) pension as a PCLS, while the remaining 75% can be used to provide income through a lifetime annuity or a flexi-access drawdown or a combination of these options.

To qualify for a PCLS, you must meet specific conditions, including:

• Reaching the normal minimum DC pension age, which is currently 55, but rising to 57 in 2028 (unless you hold a protected lower age).
• Having sufficient available LSA.
• Taking the PCLS in a period of six months before and 12 months after becoming entitled to the linked pension benefits (the “entitlement window” under HMRC rules).

As an alternative to taking a PCLS, you may withdraw one or multiple uncrystallised funds pension lump sums (UFPLS) from unaccessed DC funds.

You’re allowed to withdraw any amount as UFPLS, but only up to 25% of each such withdrawal is tax-free (subject to the permitted maximum linked to your remaining LSA and LSDBA); the remaining 75% is taxed as income at your marginal rate. If your LSA is fully exhausted, your entire UFPLS will be subject to tax.

Note that taking a UFPLS (or any taxable drawdown income) triggers the money purchase annual allowance (MPAA), reducing your annual DC contribution allowance to £10,000. Taking PCLS only does not trigger the MPAA provided no taxable income is taken at the same time.

Defined Benefit Pension Tax-Free Lump Sum

Members of defined benefit (DB) schemes are generally allowed to take a tax-free PCLS from age 55 (rising to 57 in April 2028, subject to any protected lower age).

PCLSs from a DB pension must not exceed 25% of the crystallised benefits. For this purpose, the value of your DB benefits is commonly calculated for allowance-testing purposes by multiplying your annual pension by 20, plus the value of any separate automatic lump sum.

Since DB pensions are primarily designed to provide guaranteed retirement income, PCLS is commonly created by commutation—giving up part of the annual pension in exchange for a lump sum. This trade-off is determined by the commutation factor, which is often age-related and scheme-specific.

For instance, if the commutation factor is 10:1, surrendering £1 of annual pension produces £10 of lump sum.

Certain DB schemes accrue a separate, automatic lump sum in addition to the pension. For instance, some structures may provide:

1. 1/80th of your final salary for each year of service as pension income.
2. 3/80th of your final salary for each year of service as a tax-free lump sum.

Where this applies, withdrawing the accrued lump sum will not reduce your annual pension. Additional lump sums, if permitted, will still be created through commutation, subject to scheme rules and the overall tax limits and your available LSA.

How Does Tax Residency Impact Your Tax-Free Lump Sum?

In the UK, up to 25% of your pension may be withdrawn as a tax-free lump sum (subject to your available LSA), regardless of your tax residency status for UK income tax purposes.

Any further withdrawals are generally treated as taxable income under UK domestic rules, unless a double taxation agreement (DTA) assigns exclusive taxation rights elsewhere and you successfully claim treaty relief or obtain confirmation from HMRC (e.g. by obtaining an NT code or reclaiming tax after deduction).

Once you obtain tax residency in another jurisdiction, that jurisdiction may tax both the lump sum and the ongoing pension payments under its domestic rules. A UK tax-free pension commencement lump sum does not automatically remain tax-free overseas. For instance, in some jurisdictions (including parts of the EU), countries like France and Spain may impose income tax on the 25% lump sum when it’s taken while being a resident there.

If both the UK and your country of residence have the right to tax your pension income, you may avoid paying tax twice by leveraging an applicable double taxation agreement (DTA). The UK has DTAs with over 100 countries, and these agreements usually include specific provisions regarding:

• The jurisdiction that has the primary taxing rights over pension income.
• The types of pensions covered (e.g., private vs. government service).
• The treatment of lump sums versus regular pension payments.

While many DTAs allocate the taxation of private pensions to the jurisdiction of residence, there are notable exceptions. It is essential to confirm how the relevant DTA treats both lump sum withdrawals and regular pension payments and whether any administrative steps are required before payments can be made gross.

UK inheritance tax treatment of pension death benefits (including announced changes from April 2027) is discussed above, as this is distinct from income tax and treaty considerations.

Note: Important for UK expats

A UK pension lump sum that is tax-free in the UK is not automatically tax-free in your country of residence. While the UK allows qualifying pension commencement lump sums to be paid free of UK income tax (within your available allowances), many countries tax pension lump sums under their own domestic rules.

The applicable double tax treaty, if any, determines whether the UK, your country of residence, or both have taxing rights, and not all treaties treat lump sums in the same way as regular pension income.

Before You Take a Lump Sum: Key Checks for UK Expats

Before accessing a UK pension lump sum, expats should carry out a small number of critical checks. These help ensure the withdrawal is structured efficiently and avoid unintended tax consequences across jurisdictions.

Confirm your UK tax residence status

Your UK residence position in the tax year of withdrawal (under the Statutory Residence Test) can affect whether UK PAYE is applied initially and whether treaty relief is available. Timing withdrawals around a change in residence may materially affect the tax outcome.

Check how the relevant double tax treaty treats pension lump sums

While the UK allows qualifying pension commencement lump sums to be paid free of UK income tax (within your available allowances), many countries tax pension lump sums under their domestic rules. Double tax treaties vary, and not all distinguish clearly between lump sums and regular pension income.

Understand that treaty relief is not automatic

Even where a treaty allocates taxing rights to your country of residence, UK pension providers often apply PAYE by default until HMRC confirms the correct tax treatment. This may require a formal treaty claim or subsequent tax reclaim, which can affect short-term cash flow.

Consider temporary non-residence risks

If you have recently left the UK, or may return within a relatively short period, certain flexible pension withdrawals taken while non-UK resident may become taxable under UK law if UK residence is re-established. This is particularly relevant for UFPLS and drawdown income.

Confirm your remaining pension allowances

Before crystallising benefits, it is important to confirm your remaining Lump Sum Allowance (LSA), Lump Sum and Death Benefit Allowance (LSDBA), and whether you hold any protected tax-free cash rights, as these determine how much can be taken tax-free.

Carrying out these checks before your first pension withdrawal can help align the timing and structure of lump sums with your residence position and long-term retirement plans.

How Double Tax Treaty Relief Works in Practice

Double tax treaties determine which country has the right to tax pension income, but they do not automatically change how tax is applied when a UK pension is paid.

In practice, UK pension providers will often apply UK PAYE by default to any taxable pension payments, even where a treaty allocates taxing rights to your country of residence. To receive pension income gross, or to reclaim UK tax deducted, you generally need to formally claim treaty relief and provide evidence of overseas tax residence to HMRC.

Key practical points for expats include:

1. Treaty relief is claim-based, not automatic: The existence of a DTA alone does not prevent UK tax being withheld. HMRC must be satisfied that you are resident in the treaty country and entitled to relief under the relevant treaty article.
2. Evidence of residence is usually required: This commonly involves providing a certificate or confirmation of tax residence from the overseas tax authority, alongside HMRC documentation.
3. PAYE may apply initially: Until HMRC confirms the correct tax position, pension payments may be taxed in the UK. Any excess UK tax deducted may need to be reclaimed, which can take time.
4. Lump sums and regular pension income may be treated differently: Some treaties specifically address pension lump sums, while others do not. Where treaty wording is unclear, local tax law in the country of residence may still apply.
5. Government service pensions are often excluded: Pensions relating to government or public service employment are commonly taxed in the paying state under DTAs, regardless of residence.

Because treaty wording and administrative processes vary, it is important to confirm both the substantive treaty position and the practical steps required before taking pension withdrawals.

Temporary Non-Residence: A Commonly Overlooked Risk

UK expats who take pension withdrawals shortly after leaving the UK should be aware of the temporary non-residence rules, which can override the expected tax outcome in certain situations.

Under these rules, some types of pension withdrawals taken while a non-UK resident can become taxable in the UK retrospectively if the individual returns to UK tax residence within a defined period set out in UK tax legislation.

Key points to be aware of:

1. The rules are time-based and fact-specific: Broadly, they apply where someone leaves the UK, becomes non-resident, takes certain withdrawals, and then re-establishes UK residence within a relatively short number of tax years.
2. Flexible withdrawals are most affected: Payments such as uncrystallised funds pension lump sums (UFPLS) and taxable drawdown income are more likely to be caught than a standard pension commencement lump sum.
3. The tax charge arises on return to the UK: Where the rules apply, the relevant pension withdrawals may be brought into UK taxable income in the year of return, even though they were taken while non-resident.
4. Double tax treaty protection may not apply: The temporary non-residence rules are part of UK domestic anti-avoidance legislation and can apply despite treaty provisions.

For expats approaching retirement, particularly those unsure whether their move abroad is permanent, this is an important consideration before making large or flexible pension withdrawals.

Tax-Efficient Strategies for Accessing a UK Pension as an Expat

To maximise tax-free pension lump sums and reduce the taxation of the remaining pension funds, you can implement the following high-level, tax-efficient withdrawal strategies subject to your residence status, applicable double tax treaties, and UK anti-avoidance rules: