For a decade, the 4% "safe withdrawal" rule has been the standard for UK retirees. But with rising living costs, better annuity rates, and now critically, changes to inheritance tax (IHT) coming in April 2027 that will bring unspent defined contribution pensions into your estate for IHT purposes, the conversation has shifted.
Now the goal for some is not to preserve the pension for heirs, but to spend it efficiently during their own lifetime to avoid paying more tax than necessary.
Here we've developed a calculator to help illustrate the difference between up taking a 25% pension tax-free cash all at once or via instalments (UFPLS: Uncrystallised Funds Pension Lump Sum). Interestingly, the choice made effects:
- How much tax-free cash you ultimately receive.
- Your total income and its sustainability.
- Your exposure to IHT from April 2027 onward.
- The investment growth your pot can still achieve.
Our Pension Tax‑Free Lump Sum Calculator, compares:
- Fixed Annual Withdrawal Scenario (take 25% tax-free up front; then withdraw a fixed percentage or custom amount each year from the remaining pot).
- UFPLS (Uncrystallised Funds Pension Lump Sum) Instalment Scenario (each withdrawal is 25% tax-free and 75% taxable).
A Background on UK Pensions
Most savers now retire with defined contribution (DC) pensions, where your final income depends on how much you saved and how your investments performed.
Since "pension freedoms" came into force in 2015, you can usually access your pot from age 55 (this will be rising to age 57 from April 2028), choose how and when to take money, and decide between:
- Annuities (guaranteed income for life or a fixed term)
- Drawdown/UFPLS (flexible withdrawals while keeping funds invested)
- A mix of both
Key tax features:
- Up to 25% of your pot can be taken tax‑free, capped at £268,275 unless you have protected rights.
- The remaining 75% is taxable as income when you withdraw it.
- Your withdrawals stack on top of other income (such as salary and State Pension), potentially pushing you into higher tax bands if you take too much in one year.
Market realities and "Rules of thumb"
The 4% rule stems from historical research indicating a 30-year retirement could often be supported with an initial 4% withdrawal, adjusted annually for inflation. It’s a guide, not a guarantee.
In recent UK experience, 4% has often proved conservative—especially during a decade of strong markets after 2015.
If your goal is to fully wind down the pot by, say, age 90, and you assume around 6% net investment growth, withdrawal rates north of 6% can sometimes be feasible. But this is sensitive to market returns and the sequence of those returns.
You can use our Pension 4 percent vs 6 percent Strategy Calculator to see how the difference scenarios play out with an itemised annual pension breakdown.
Inheritance tax (IHT) now and from April 2027
At present, pensions generally sit outside your estate for IHT purposes, which is why many people historically drew less from pensions (e.g. 4%) and planned to pass the pot on.
Two crucial changes alter that chain of thought:
- From 6 April 2027, unused DC pension funds and certain death benefits are scheduled to be included in your estate for IHT purposes.
- If you die after age 75, beneficiaries may also pay income tax on pension withdrawals they receive—creating the possibility of “double tax” (IHT + income tax).
IHT basics today:
- Standard nil-rate band: £325,000 per person (frozen until 2030).
- Residence nil-rate band: up to £175,000 if leaving your main home to direct descendants.
- Transfers to a spouse/civil partner are generally IHT-free, and unused allowances can be transferred—so a couple may shield up to £1 million on second death if the home passes to children/grandchildren.
- Effective IHT rate is 40% on the value above the thresholds (36% if at least 10% of your net estate is left to charity).
What this means for pensions after April 2027
Unspent pension funds will no longer be a simple IHT shelter. You may prefer to spend more from pensions during your lifetime (or gift strategically) rather than risk 40% IHT on what’s left—subject to ensuring your own lifetime needs are covered. The timing and size of withdrawals should be planned to avoid unnecessary higher-rate income tax.
Lump sum versus instalments (UFPLS): how the trade-offs work
With the 'Fixed Annual Withdrawal Scenario' you take up to 25% tax-free cash immediately (subject to the £ 268,275 cap). The rest remains invested and you withdraw a fixed percentage each year (4%, 6%, or a custom rate).
The benefits of doing this are obvious. You get a large, immediate cash buffer for big goals: mortgage payoff, major home improvements, helping children, or funding early retirement travel. It's also the simplest option as you know your initial tax-free amount and can structure a predictable income from the remainder.
The downsides are that when removing 25% from your pension pot on day one, you reduce the capital available to compound with gains/interest.
If you don’t need the cash now, moving it out may increase your future IHT exposure (because once outside the pension wrapper, that money is part of your estate unless you gift it effectively and survive seven years).
If you later contribute to pensions, note the Money Purchase Annual Allowance (MPAA) rules can be triggered depending on how income is taken; this can reduce future contribution allowances.
Now, the next scenario - the UFPLS Instalment Scenario. Here each withdrawal is treated 25% tax‑free and 75% taxable.
You don’t crystallise the entire pot at once; the uncrystallised funds stay invested.
The major benefit it the potential for more total tax‑free cash over time if the remaining invested pension pot grows, because 25% applies to a larger future value.
You also get smoother tax planning each year as every withdrawal includes a tax‑free slice, which can help you keep taxable income within your desired band.
Overall you keeps more money invested for longer, benefiting from compounding if markets are favourable.
The downsides are depending on your luck if markets fall, or if you withdraw aggressively and you end up with less tax-free cash than hoped. Income can decline over time if you take a fixed percentage of a shrinking pot.
A minor issue is also the slightly more admin and planning compared to taking the one-off lump sum.
Which produces more tax-free cash? Pension lump sum or withdrawals?
In growth scenarios, UFPLS often yields more total tax-free cash over your retirement because the 25% is repeatedly calculated on each withdrawal from a pot that may have grown.
If you take the lump sum and then draw the rest quickly, you may miss that compounding opportunity.
What about Inheritance tax?
This is important to consider as from April 2027 unused pension funds will count for IHT, narrowing the IHT advantage of leaving money in the pot. That makes the "spend during lifetime versus leave to estate" decision much more balanced, and often tilts toward a controlled spend-down plan, so long as you avoid higher income tax bands unnecessarily.
If your projected estate (including property) is likely to exceed available allowances, leaving a large pension unspent could carry a 40% IHT drag from April 2027.
If you have a spouse/civil partner and plan to pass everything to them, there may be no IHT at first death, but the combined estate could still breach thresholds at second death.
If you intend to gift significant amounts during your lifetime, plan early to start the seven-year clock for PETs (potentially exempt transfers), and consider your own longevity and care needs first. If you die after 75, your beneficiaries pay income tax on pension withdrawals they receive. Combined with IHT after 2027, this can be a substantial tax stack—another reason to model a sensible spend-down path.
Using our Pension Lump Sum vs Instalment Withdrawals Calculator
Set your inputs:
- Total Pension Pot Value: Enter your current pension size.
- Your Age at Pension Withdrawal Start: Must be at least 55 today; from April 2028 the minimum age is 57. The calculator will check this and will warn if you’re too young.
- Expected Annual Investment Growth (%): A long-term, net-of-fees estimate. We default it to 6%.
- Withdrawal Strategy: Traditional 4% Rule, New 6% Rule: Calculates the rate to deplete the post‑lump‑sum pot by age 90 given your growth assumption.
- Custom Withdrawal Rate: Enter your own percentage if you prefer a bespoke plan.
- Include Inheritance Tax Impact (from April 2027): Tick to show contextual IHT notes for any remaining balance at age 90. The calculator will explain allowances but cannot compute an estate-level IHT bill as that's rather more complicated and needs more information from you!.
- Compare Taking Tax‑Free Cash in Instalments: Tick this to show the UFPLS scenario alongside the lump sum scenario.
That's it!, you can then click calculate but the calculator will auto-update with every input change.