When you start drawing benefits from your pension scheme, you are usually able to withdraw a tax-free lump sum. You'll typically have the option to take up to 25% of the overall pension fund as tax-free cash; in some cases, you may have a hidden benefit of protected tax-free cash which means you could be entitled to a higher amount. However, if you have a defined benefit (e.g. final salary) pension, the scheme rules will normally control how much tax-free cash you’ll receive and how you can take it.
You don’t always have to take your tax-free cash all in one go, and it all depends on what retirement option you choose and how much of your pension you access at a time. For example, you might take a smaller amount of income and use the rest of your pension fund in an invested retirement product such as a flexible access drawdown, which would mean you could access more tax-free cash or taxable income later on.
In certain circumstances, some people may be able to receive more than this. If the value of your pension pot exceeds the lifetime allowance when you draw retirement benefits, the amount of pension commencement lump sum (PCLS) that you can receive is usually limited to 25% of the lifetime allowance. You may be able to receive a PCLS in excess of 25% of the lifetime allowance if you have applied to HMRC for either scheme-specific lump sum protection or one of enhanced protection, fixed protection or primary protection in a year when the lifetime allowance has been reduced. Different terms and conditions apply to each of these protections.