The Institute for Fiscal Studies, earlier in the year, proposed reforms to the pension system, including scrapping the 25% tax-free lump sum, 

Key Points

  • The Institute for Fiscal Studies (IFS) proposes to scrap the 25 % tax-free lump sum to create a more equal subsidy for all private pensions.
  • The current tax subsidy for the tax-free lump sum mainly benefits high-income earners.
  • The IFS suggests capping the tax-free pension lump sum at 25% of the first £400,000 of pension wealth to ensure a fairer distribution of tax subsidies and provide equal after-tax value for everyone’s pension.

What is Pension Tax-Free Cash?

Pension tax-free cash is a lump sum taken from a pension fund that is exempt from taxation. The IFS proposes to scrap this in order to even out tax support for pension saving. Generally, up to 25 per cent of crystallised benefits can be taken as tax-free cash. This amount is linked to the value of the benefits being crystallised and is based on the available lifetime allowance.

Taking tax-free cash before age 75 usually means receiving up to 25% of the fund being crystallised. After age 75, it’s typically the lower of either the remaining unused fund or the remaining LTA. Defined benefit schemes have their own rules on providing more restricted levels of tax-free cash depending on scheme rules and commutation factors used by schemes.

The deferring of taking tax-free cash beyond age 75 results in its loss upon death. Beneficiaries will be subject to income taxes for any amounts received. 

Will they Scrap Tax-Free Cash?

The IFS proposed scrapping the tax-free cash option for pensions, which currently allows individuals to take a quarter of their pension tax-free. 

However, some are concerned that this could discourage employer contributions and reduce confidence in retirement savings planning. 

As a Financial adviser, this question comes up each year from my clients who are worried about potentially losing earmarked money. Tax-free cash from pensions is an important part of cash-flow planning. Many have this earmarked for paying off debt such as a mortgage or to use to buy an investment property in retirement. People begin to plan how to use the tax-free cash from their pensions at least five years from their intended retirement. This is why scrapping it would be political suicide for any government that intends to bring this in. 

The number of people this will affect across the board, from basic to high tax-payers, means few would encourage legislation for a total ban on tax-free cash. Simply it affects nearly everyone who has money in pensions. 

There could be a scenario where in the future, the amount of tax-free cash from new pension contributions is reduced, but to limit access to legacy pension payments would be the death of any Chancellor who suggests it, in my opinion. Of course, this could happen, we have been surprised many a time on the budget day before, but a total scrapping of tax-free cash might be a step too far. 

At what age can I access tax-free cash?

Generally, you can access tax-free cash from age 55, though in some cases, if you have protected tax-free cash with your scheme pension, you may be able to access this from age 50.

However, the age at which you can take tax-free cash is also set to change from 55 to 57 on 6 April 2028. Anyone born after 6 April 1973 could find they must wait an additional two years to access their pension. 

Do I need to take all my tax-free cash at once?

No, you don’t need to take all your tax-free cash in one go. You can opt to withdraw it in smaller portions until 25% of your total pension pot has been crystallised. This allows you to manage your retirement savings more effectively and ensure that you are not taxed too heavily on a large lump sum withdrawal.

Furthermore, it provides flexibility as you can choose when and how much of the tax-free component to access. 

What are the IFS Proposing

You can read the full report here, but here is a document summary.

Title: A Blueprint for a Better Tax Treatment of Pensions – Published by The Institute for Fiscal Studies in February 2023 – 

Purpose: to help improve financial well-being for people on low-to-middle incomes – 

Contents: – Executive summary: a brief overview of the report – 

Introduction: explains the background and context of the report – 

Background: provides information on private pensions in the UK and how the context has changed – 

Current system: describes the UK pensions tax system and how much it costs – 

Principles for the taxation of pensions: explains why the overall tax system matters – 

Method for quantifying the impacts of reforms: describes how the report measures the effects of different reform options –

Comparison of the current system of pensions taxation with two benchmark tax systems: shows how the UK system compares to other countries – 

Options for reform, including some that are recommended: proposes specific measures to improve the current system – 

Conclusion: summarises the report’s findings and recommendations – 

Empirical methods used to quantify the fiscal and distributional effects of the current UK pensions tax system and various reform options 


Always seek help from a financial adviser if you don’t fully understand what options to take.

© 2021 The Pension Transfer Specialist Arthur Browns Wealth Management are Authorised & Regulated by the Financial Conduct Authority – Number 825843.