Tax-free cash and the £268,275 lump sum allowance: the pot size where 25% stops, with four client pots worked through

A client of 62 has three pensions worth £1.2 million between them and asks a plain question before the review: "How much can I take out tax-free?" The answer used to depend on a lifetime allowance. Since 6 April 2024 it depends on a lump sum allowance, and the maximum is a fixed cash figure, not just a percentage.

What GOV.UK says

GOV.UK's page on the lump sum allowance says that you can usually take up to 25% of the amount built up in any pension, with a maximum of £268,275. It sets a separate lump sum and death benefit allowance of up to £1,073,100 for certain circumstances: GOV.UK gives a lump sum paid because of serious illness and some death benefits paid to beneficiaries as examples.

On amounts above the allowances, the page says Income Tax must be paid on the extra amount, and that the provider deducts it before payment. It also says the lifetime allowance was abolished on 6 April 2024, that people who had protection from before April 2016 may find it carries over to the lump sum allowance and the lump sum and death benefit allowance, and that reduced allowances may apply for early access in some cases: an eligible job, a scheme joined before 2006 and a lump sum taken before 55. The page gives no worked example and no date, so the arithmetic below is the firm's own working.

Where the cap bites

The cap is £268,275 and the usual rate is 25%, so the two meet where £268,275 / 0.25 = £1,073,100. Below that pot size, the 25% is the limit. Above it, the cash figure is. Four pots:

The last row is the client in the story. Taking 25% of £1,200,000 would give £300,000, but the cap holds the tax-free part at £268,275. The extra £31,725 is taxed as income, as the page puts it. At 20% that is £6,345 and at 40% it is £12,690. The client's other income that year sets the rate, which the page does not cover.

What the firm should check before the meeting

1. The size of the pot at the date of the payment, not the date of the last statement.
2. Which allowances the client has already used. The page describes the allowance as one figure "in any pension", so a client who has taken tax-free cash from another arrangement may have less than £268,275 left. The page does not set out how remaining allowance is counted, so confirm it with the provider and HMRC's guidance before quoting a figure.
3. Protection and early access. Ask whether the client holds protection from before April 2016, and whether an early-access case could reduce the allowance.
4. The tax on any excess, shown beside the gross figure in the report, with the client's likely rate stated as an assumption.
5. The death benefit side, if the client is asking about what a beneficiary could receive, which is the £1,073,100 allowance on GOV.UK's description.

Record the figures in the file note, so the suitability reasoning can be traced. Our suitability report file check shows what a file reviewer looks for, and the guide to carry forward and the annual allowance covers the contribution side of the same pension rules. If the client's estate planning is in play, the April 2027 pension inheritance tax workload plan covers the next date to plan around.

Overlyft builds AI staff who join the advice team and prepare the pre-meeting fact sheet: they pull each pot's value from the provider papers, run the 25% and cap table above, note which allowance questions are still open, and hand the adviser a draft to check and sign off. The adviser's time stays with the client conversation.

This is general information, not financial or tax advice. Check GOV.UK and HMRC guidance for a client's own position.