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Don’t Miss Out on Thousands in Tax-Free Pension Cash – The HMRC Rule You Need to Check Now
Vicky Parry
25th Feb 2026
A little-known pension rule could mean you miss out on thousands of pounds of tax-free cash in retirement — and many people don’t realise it applies to them.
The Government scrapped the lifetime allowance in 2024, which sounded like great news for pension savers. But what replaced it is a new tax-free pension cap that’s quietly catching people out.
Now, experts are urging savers to check their pension pots sooner rather than later — because waiting could cost you.
Here’s what the HMRC pension cap means in plain English, and what you should do now.
What is the HMRC pension cap?
The rules are set by HM Revenue & Customs (HMRC), and they limit how much of your pension you can take tax-freeover your lifetime.
For most people:
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The maximum tax-free pension lump sum is £268,275
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This is known as the Lump Sum Allowance
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It applies across all your pensions combined
In the past, you could usually take 25% of your pension pot tax-free. Many people still think that’s the case — but it’s no longer unlimited.
Now, once you hit the £268,275 cap, any further withdrawals are taxed as income.
Why you’re being told to check now
This isn’t just something for the super-rich.
More ordinary savers are being pulled into the cap because:
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Pension pots are growing
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The tax-free limit is frozen
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Inflation is eroding its real value
That means people who thought they were nowhere near any limits may now be closer than they realise.
You should check your pension urgently if you:
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Have built up a decent workplace pension over many years
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Have more than one pension pot
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Earn a higher salary or have had steady career growth
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Are within 10–15 years of retirement
Even if retirement feels ages away, the decisions you make now could affect how much tax-free cash you get later.
How you could lose out
Let’s say your pension grows to £1.2m by the time you retire.
You might assume you can take 25% tax-free — about £300,000.
But under the current cap, you’d only be able to take £268,275 tax-free.
The rest would be taxed when you withdraw it.
That’s potentially tens of thousands lost to tax that you weren’t expecting.
Who needs to be especially careful?
Some savers should pay particular attention.
People with larger pensions
If your total pension savings are heading towards £1m or more, you’re most likely to hit the cap.
Those with multiple jobs or pensions
Old workplace pensions add up quickly — and the cap applies across all of them.
Anyone with lifetime allowance protection
You may have locked in a higher tax-free allowance under old rules. But certain actions can accidentally cancel that protection.
Anyone close to retirement
The timing of when you take your tax-free lump sum could make a big difference.
What happens if you go over the limit?
Nothing dramatic happens — you won’t get fined.
But you will pay tax on anything above your tax-free allowance when you withdraw it.
Large withdrawals can:
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Push you into a higher tax band
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Increase the tax you pay overall
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Reduce the value of your retirement savings
This is why planning ahead matters.
What you should do now
Don’t panic — but do check.
Start here:
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Add up all your pension pots
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Check their current value
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Look for any lifetime allowance protection paperwork
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Review your retirement timeline
If your pension is sizeable, it may be worth speaking to a financial adviser about how and when to take your tax-free cash.
A quick check now could save you thousands later.
The bottom line
The lifetime allowance may be gone — but a tax-free pension cap is still very much in place.
And because it’s frozen, more people will be caught by it every year.
You don’t need to be wealthy to be affected. You just need to have saved consistently into a pension.
So if you haven’t checked yours recently, now might be the time.
This article is for information purposes only and does not constitute financial or tax advice. Pension and tax rules can change and their impact will depend on your individual circumstances. Always do your own research and consider speaking to a qualified financial adviser or HMRC before making decisions about your pension or retirement planning.
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