Set Up Tax-Free Cash in the App

Most people with a DC pension can take up to 25% of their pot tax-free, up to a lifetime cap of £268,275. The Finance Planner gives you three ways to use this — and you set your preference in Module 3.

THE THREE OPTIONS

Option 1 — Full lump sum at retirement

The full 25% is taken as a one-off payment on your retirement date. Simple and straightforward — the rest of your pot then moves into drawdown and is taxed as income when you withdraw it.

Option 2 — Spread across drawdown (UFPLS)

No lump sum is taken. Instead, every withdrawal you make from the pension in retirement is automatically 25% tax-free, with the remaining 75% taxed as income. This continues until your £268,275 lifetime allowance is used up. This approach can be more tax-efficient if taking a large lump sum would push you into a higher tax band in the year you retire.

Option 3 — Partial split

A middle ground: you choose a percentage to take as a lump sum at retirement, and the remainder is treated as UFPLS in drawdown. For example, choosing 50% means half your tax-free entitlement is paid as a lump sum; the other half is spread across future withdrawals.

HOW TO SET IT UP (Module 3)

1. Go to the Finance tab and open the Finance Planner wizard.
2. Navigate to Module 3 — DC Pensions.
3. Scroll to the Tax-Free Cash section.
4. Select your preferred option: Full lump sum, Spread across drawdown, or Partial split.
5. If you choose Partial split, enter the percentage you want as the lump sum.

This setting applies across all your DC pots combined — the planner allocates the tax-free entitlement from your DC pension first, before any DB commutation.

TAX-FREE CASH FROM A FINAL SALARY PENSION (Module 4)

If you also have a defined benefit (DB) or final salary pension, you can take a tax-free lump sum by exchanging part of your annual pension for a one-off payment. This is set up in Module 4 and uses a commutation factor of £20 lump sum per £1 of annual pension given up.

Important: DC and DB tax-free cash share the same £268,275 lifetime cap. If your DC pot is large enough to use the full cap, there’s nothing left for DB commutation. The planner handles this automatically.

WHICH OPTION IS RIGHT FOR YOU?

This is a personal financial planning decision. The planner lets you model all three options — change the setting in Module 3 and check Module 7 and Module 10 to see how each approach affects your projected income and tax position. If you’re unsure, speaking to a financial adviser is a good idea before making an irreversible choice.

RetirePlan — retireplan.co.uk | Using 2026/27 UK tax rates | This tool provides guidance only and does not constitute regulated financial advice.