Defined Contribution Pension Lump Sum Withdrawals for UK Expats: Rules, Tax, and Overseas Considerations

This article will outline the three primary types of defined contribution pension lump sum withdrawals, explain their potential tax treatment for UK expats living overseas, and suggest tax-efficient approaches for managing DC pension payments taking into account UK tax rules, tax residency, and double tax treaties.

What Are the Rules for Taking a Defined Contribution Pension as a Lump Sum?

For a defined contribution pension, you can typically begin withdrawing DC pension benefits, either as an income stream or a lump sum, once you reach age 55 (rising to 57 from 6 April 2028).

From 6 April 2024, the total amount of lump sums you can receive free of UK income tax is limited by the lump sum allowance (LSA), set at a standard £268,275 across all your UK pensions.

The LSA caps the total amount of tax-free lump sums you can take during your lifetime. A separate allowance, known as the lump sum and death benefit allowance (LSDBA), limits the total value of tax-free lump sums that can be paid during your lifetime and as death benefits. Amounts paid above your available allowances are taxed as income.

UK tax legislation does not require defined contribution pensions to be fully withdrawn by age 75. However, some older or more restrictive pension schemes may impose limitations on benefit payments after age 75, in which case transferring to a more flexible arrangement may be required.

If you defer taking pension benefits and pass away on or after age 75, any subsequent payments to beneficiaries are generally taxable at their marginal rate, based on the beneficiary’s own tax position, and any unused entitlement to tax-free cash will not be applicable after your death.

For non-UK resident beneficiaries, local tax rules and any applicable double tax treaty may also affect the overall tax outcome.

What Types of Defined Contribution Lump Sum Withdrawals Are Available to UK Expats?

Withdrawing a DC pension as a lump sum may provide expats with greater flexibility and immediate access to capital, subject to pension scheme rules and the applicable tax treatment in the UK and country of residence.

Depending on your financial plans and retirement goals, DC pension lump sums can be taken in the following forms:

1. Pension commencement lump sum (PCLS).
2. Uncrystallised funds pension lump sums (UFPLS).
3. Full lump sum withdrawal.

Pension Commencement Lump Sum (PCLS)

The pension commencement lump sum (PCLS) is the tax-free portion of your DC pension that you can receive once you become entitled to the linked pension benefit.

For DC benefits, the PCLS is typically up to 25% of the crystallised value, subject to the permitted maximum, being the lower of your available lump sum allowance (LSA) and the relevant portion of your lump sum and death benefit allowance (LSDBA).

The conditions for receiving a PCLS include the following:

• You have reached the normal minimum pension age
• You have sufficient LSA and LSDBA remaining.
• The PCLS is paid in connection with the crystallisation of pension benefits, in accordance with HMRC rules and the pension scheme’s terms.
• The lump sum does not exceed the permitted maximum.

A lump sum withdrawal that fails to meet PCLS conditions may be treated as an unauthorised payment and attract a 40% unauthorised payment charge. An additional 15% unauthorised payment surcharge may apply if the total unauthorised payments exceed 25% of your pension fund within a 12-month period.

Uncrystallised Funds Pension Lump Sums (UFPLS)

You may withdraw unaccessed DC pension funds as one or multiple uncrystallised funds pension lump sums (UFPLS) once you reach age 55.

Each UFPLS is typically treated as 25% tax-free and 75% taxable, but the tax-free element is limited by your permitted maximum—the lower of your remaining LSA and LSDBA. You may still receive a UFPLS even if you have no allowances remaining, but in that case, the entire withdrawn amount will be taxable at your marginal rate.

For instance, withdrawing £50,000 from a £500,000 DC pot would typically result in £12,500 treated as tax-free (subject to available allowances) and £37,500 taxed as income.

Note that taking a UFPLS (or any taxable drawdown income) triggers the money purchase annual allowance (MPAA). As a result, the annual money-purchase contribution allowance is reduced from £60,000 to £10,000, and unused allowance cannot be carried forward. Taking a PCLS alone does not trigger the MPAA.

Full Lump Sum Withdrawal

You may withdraw your entire DC pension as a single lump sum once you reach age 55. If taken this way (for example, via a UFPLS), up to 25% is typically tax-free, subject to your unused LSA, while the remaining 75% is taxed as income at your marginal rate.

A full DC pension pot can be withdrawn entirely tax-free only in the form of a serious ill-health lump sum (SIHLS), and only if all of the following conditions apply:

• You are under the age of 75.
• The payment does not exceed your available LSDBA.
• A registered medical practitioner confirms your life expectancy is less than a year.

Withdrawing an entire DC pension as a single lump sum generally carries more risk than taking a PCLS or phasing withdrawals through multiple UFPLS, as it can create a substantial income tax liability in the UK and potentially in your country of residence.

However, a full withdrawal may be appropriate for expats planning to retire abroad or reinvest capital strategically, provided the local tax treatment, reporting obligations, and double tax treaty position have been carefully assessed. The table below outlines the key considerations:

Such strategies are not suitable for all expats and may be ineffective or disadvantageous for individuals who remain UK-resident, are treated as UK long-term residents for UK tax purposes, or are subject to UK anti-avoidance legislation.

Our expert financial advisers at Titan Wealth International can evaluate your objectives and circumstances, and recommend a withdrawal and deployment strategy designed to minimise cross-border tax exposure while preserving and growing your retirement assets.

Why Withdrawal Structure for UK Expats Matters for Long-Term Wealth

Beyond the immediate tax implications, how you structure defined contribution pension withdrawals can have a significant impact on the long-term value of your retirement assets, particularly for UK expats with income and investments across multiple jurisdictions.

A UK pension is itself a tax-advantaged wrapper, allowing investments to grow largely sheltered from UK income tax and capital gains tax.

Withdrawing funds as a lump sum removes those assets from the pension environment and may expose future investment growth to taxation in your country of residence, potentially reducing the benefits of long-term compounding.

For this reason, pension lump sum decisions should be considered alongside your wider financial position, including non-pension investments, property, and other sources of retirement income.

In many cases, a phased approach to withdrawals—using tax-free cash strategically while retaining invested pension assets—can help manage tax exposure, preserve capital, and maintain flexibility as your residency status or tax rules change over time.

For UK expats, these considerations are further influenced by overseas tax treatment, currency exposure, and how post-pension investments are taxed under local law. Structuring withdrawals without regard to these factors may result in unnecessary tax drag or reduced net returns over the long term.

Careful planning can help ensure that pension withdrawals support not only short-term cash flow needs, but also long-term wealth retention, allowing more of your investment gains to be preserved rather than lost to taxation.

How Are Defined Contribution Pension Lump Sum Withdrawals Taxed for UK Expats?

Your tax liability upon withdrawing a defined contribution pension as a lump sum generally depends on your tax residency status at the time the payment is made, the nature of the lump sum, and the terms of any applicable double tax treaty.

UK residents are taxed on worldwide income and gains, while UK non-residents are typically taxed only on UK-sourced income. UK pension income and lump sums are treated as UK-source income; however, the UK’s right to tax such payments may be restricted or overridden by a double tax treaty where treaty relief is properly claimed.

While the 25% PCLS withdrawal is tax-free under UK rules, it may not receive the same treatment in your country of residence. Certain jurisdictions, such as France, impose tax on lump sum pension withdrawals for their residents and may also levy social charges, depending on the individual’s tax status and healthcare affiliation.

While UK pensions currently fall outside your taxable estate for inheritance tax (IHT) purposes, current legislation provides that this position is expected to change from 6 April 2027. Under the proposed rules, unused DC pension funds and death benefits would be considered part of your estate for IHT purposes and could be subject to 40% IHT if the total value of your estate exceeds the nil-rate band of £325,000.

Can You Avoid Double Taxation of Lump Sum Pension Withdrawals?

Double taxation may arise if both the UK and your country of residence assert taxing rights over the same UK pension withdrawal. In many cases, you can avoid paying tax twice on the same income, provided the UK has a double taxation agreement (DTA) with your country of residence and the relevant treaty conditions are met.

The UK maintains DTAs with over 130 countries, including:

• USA
• Australia
• Singapore
• UAE

These agreements typically protect expats from double taxation using one of the following two methods:

1. Allocating the primary taxing rights to one jurisdiction.
2. Allowing a foreign tax credit in one country to offset the tax liability in the other.

Where a relevant DTA assigns taxing rights to the country of residence, and that country imposes little or no tax on pension income, UK expats may, in practice, be able to receive a DC lump sum with no overall tax liability, provided treaty relief is correctly claimed and local tax law does not impose a separate charge on lump sums.

For instance, the UK-UAE double tax treaty generally assigns the primary taxing rights over pension income to the country of residence.

Since the UAE does not currently impose taxes on pension income, a UAE tax resident may, in practice, have no UK or UAE tax liability on a UK pension lump sum withdrawal, subject to correct treaty interpretation, HMRC clearance where required, and completion of the relevant UK “pay-gross” or relief-at-source procedures.

How To Manage Defined Contribution Lump Sum Withdrawals Efficiently?

To ensure tax efficiency when withdrawing a lump sum from a defined contribution pension, consider the following approaches:

1. Delay or phase withdrawals
2. Move the pension into a flexi-access drawdown
3. Purchase an annuity
4. Seek expert advice

Delay or Phase Withdrawals

Taxable income exceeding £50,271 is subject to a 40% tax rate in the UK, while any income over £125,140 is taxed at a rate of 45%.

These thresholds apply to UK income tax bands as at the 2025/26 tax year. Accordingly, withdrawing the entire DC pot or taking larger lump sums in a single tax year can create a substantial tax liability in the UK and diminish the value of your retirement savings.

To improve tax efficiency, consider phasing withdrawals over multiple tax years. Assuming your LSA is available, you may do the following:

1. Year 1: Crystallise a portion of your pension pot and take PCLS up to your remaining LSA to avoid tax liability.
2. Subsequent years: Take smaller taxable withdrawals, keeping your total taxable income within your desired tax band.

Smaller annual lump sum withdrawals also benefit from the personal allowance (£12,570) to reduce taxable income. (Note that the allowance tapers once income exceeds £100,000).

Non-UK residents are not generally entitled to the UK personal allowance unless specific conditions are met or treaty relief applies.

Where possible, consider delaying taxable withdrawals until after retirement to avoid overlapping with employment income.

If you plan to retire in a low- or zero-tax jurisdiction that has a DTA with the UK, delaying withdrawals until you establish tax residency may reduce UK tax exposure in practice, subject to the treaty’s allocation of taxing rights, successful treaty relief claims, and the local tax rules.

Move the Pension Into a Drawdown

Withdrawing a DC pension as a single lump sum removes those assets from the pension wrapper. While the proceeds can be invested elsewhere, they will no longer benefit from UK pension-specific tax advantages or sheltered growth within the plan.

To maximise long-term value and minimise tax liability, consider moving your pension into a flexi-access drawdown, which allows you to keep funds invested while drawing benefits in a controlled manner.

When you crystallise funds for drawdown, you can typically withdraw up to 25% as a tax-free PCLS, while the balance remains invested, and any subsequent withdrawals are taxed at your marginal rate. Taking taxable drawdown income will trigger the money purchase annual allowance (MPAA).

You can structure a drawdown in two primary ways:

Purchase an Annuity

Withdrawing a defined contribution pension as a PCLS and using the taxable portion to purchase an annuity allows you to access the 25% tax-free cash and secure regular retirement income for life or a fixed term.

When you purchase an annuity, you enter a contract with an insurance company, agreeing to have your pension fund converted into steady income. While annuity income is taxable once you begin receiving payments, tax is generally only applied as payments are received rather than upfront, which can help manage annual tax exposure.

The amount of income you will receive during retirement depends on the:

• Invested sum
• Your age at purchase
• Health and lifestyle
• Prevailing annuity rates

There are different types of annuities available to UK expats, some providing fixed income during your lifetime or for a set period, while others extend the payments to your spouse after you pass away. Availability and provider terms may vary for non-UK residents.

Seek Expert Advice

Engaging a qualified financial adviser is crucial for efficiently managing defined contribution pension lump sum withdrawals. An expert can help optimise your pension withdrawal strategy to minimise cross-border tax liability and enhance long-term wealth retention.

More specifically, consulting a financial adviser provides the following key benefits:

• Personalised pension withdrawal advice tailored to your financial circumstances, retirement plan, and tax residence.
• Clear guidance in understanding your UK and overseas tax obligations, with support to maintain full compliance.
• Assistance in applying double tax treaties to mitigate—or where possible eliminate—double taxation on pension withdrawals.