Do defined benefit pensions use up the lump sum allowance?

Tax-free cash from a defined benefit pension counts against the £268,275 lump sum allowance; the pension paid as income does not use any of it.

Pension Wise, from MoneyHelper, offers free, impartial guidance backed by government and can talk through your options. How much allowance a lump sum would use is a question for the scheme. Pensions held elsewhere? Jot every scheme into the form on this page: whichever FCA-authorised adviser rings you back can then weigh up the whole set, with no fee involved.

What uses the allowance and what does not

GOV.UK's guidance on the allowance names three lump sums that count towards it: a pension commencement lump sum, the 25% tax-free part of an uncrystallised funds pension lump sum, and a standalone lump sum (Lump sum allowance, read 20 October 2026).

A defined benefit scheme's retirement lump sum is the first of these. The cash may be written into the scheme's rules, as in the NHS Pension Scheme's 1995 Section, where a retirement lump sum is paid automatically and is normally three times the annual pension. Or it may exist only by giving up part of the pension, as in that scheme's 2008 Section, which has no basic lump sum at all. The NHS scheme confirms its retirement lump sum is a pension commencement lump sum for the allowance, and HMRC's manual says "the full value" of such a lump sum is deducted from it. Section 637P of the Income Tax (Earnings and Pensions) Act 2003 sets the allowance at £268,275.

The same manual defines the test: for the allowance, a relevant benefit crystallisation event occurs when someone becomes entitled to a relevant lump sum, and it lists the relevant lump sums as those three. A scheme pension paid as income is not one of them, and since the lifetime allowance was abolished on 6 April 2024 it is the lump sum taken alongside the pension that is tested. A pension that is deferred has no lump sum to test yet, because, the manual says, a pension commencement lump sum cannot be linked to a pension while it is deferred; the position at claiming age is in deferred defined benefit pensions.

Because the allowance runs across every scheme you belong to, a lump sum from a final salary scheme leaves less for a personal pension and the other way round; lump sums from two pensions covers that and the records a scheme will ask for. Anything above what remains is taxed as income, as the tax-free lump sum guide explains. The NHS scheme adds that paying benefits as a trivial commutation lump sum or small lump sum "does not use up any of these allowances"; that is its statement about its own payments, and trivial commutation has the conditions.

Two limits on a defined benefit lump sum, and the lower one applies

A scheme lump sum has to clear two tests. One is the allowance above. The other is a cap on the lump sum as a share of the pension's value. HMRC's Pensions Tax Manual says the permitted maximum is "the lower of" the applicable amount, the available lump sum allowance and the available lump sum and death benefit allowance, and that in broad terms the applicable amount "represents 25% of the capital value of the benefits coming into payment".

A final salary pension has no pot to take a quarter of, so the statute values it by formula: a valuation factor of 20 times a year's pension at its starting rate, plus the lump sum, with the applicable amount a quarter of that total. Where the lump sum is bought by commuting pension, it is "the actual post-commutation pension" that goes into the sum. The NHS scheme's member guide puts the same test in its own words: the capital value is "calculated by multiplying your pension by 20 and adding any lump sum to be paid".

The rate at which pension is swapped for cash is not set by HMRC. It is the scheme's commutation factor, and schemes differ, so the figure to ask for is your own scheme's. The NHS guide for the 1995 Section (print code V25 05.2024) gives "£12 of lump sum for every £1 of pension you give up", and describes its maximum as "approximately 5.36 times your annual 1995 Section pension" in the majority of cases. Neither is a figure for other schemes; see the final salary lump sum and the NHS pension lump sum.

Worked through for two invented members

This is our own working, dated 20 October 2026, for two made-up members of the NHS 1995 Section. It uses that scheme's terms (an automatic lump sum of three times the pension, and £12 of lump sum for each £1 of pension given up, which the guide offers to members actively contributing on or after 1 April 2008) and HMRC's quarter test, with no earlier lump sums and no protection. It is not a forecast of anyone's real figures, and other schemes use their own rules.

For A, the quarter test is 20 × £10,000 plus the lump sum, divided by four. Swapping at £12 per £1 gives up about £1,964 a year of pension for a lump sum of £53,571, the 5.36 times the NHS guide describes; the £30,000 automatic lump sum alone would leave £238,275 of allowance. For B, the same test alone would permit about £321,429, which is more than £268,275, so the allowance is what stops the lump sum: B could swap about £7,356 of pension for the extra £88,275 and has nothing left for tax-free cash from any other pension.

So a large pension can reach the allowance before the quarter limit. Close to that point? Your scheme's name and lump sum figures are for the form on this page; next, an FCA-authorised adviser phones to talk it over, unbilled.

When your own allowance is higher or lower

The £268,275 is the standard figure. A protection held from the lifetime allowance years can raise it; which ones do so is set out in the tax-free lump sum guide and the lifetime allowance and what replaced it.

Benefits already paid before 6 April 2024 can work the other way. The NHS scheme says a member's available allowance can be "lower than the standard amount if you have previously crystallised and used some or all of the lifetime allowance", and that the member is told how much of it a lump sum has used. HMRC's manual says that if a member gives the scheme no information, the administrator assumes no allowance is available, so it is worth gathering those figures first; lump sums from two pensions covers the records and the transitional rules.

Questions about defined benefit lump sums and the allowance

If I take no lump sum, does my defined benefit pension use any allowance?

The allowance is tested when you become entitled to a relevant lump sum, and each relevant lump sum on HMRC's list is a lump sum, not income. Check with the scheme how it records your position.

What happens if the lump sum is bigger than the allowance I have left?

HMRC's manual says the excess is charged Income Tax at the individual's marginal rate.

Does a death lump sum from a defined benefit scheme use the same allowance?

Not in the same way. GOV.UK puts certain lump sum death benefits under the larger lump sum and death benefit allowance, though any lump sum that counts towards the lump sum allowance also counts towards that one. The lump sum and death benefit allowance has the detail.

Does taking a bigger lump sum change my pension for life?

Where the cash comes from commuting, yes: the NHS guide is clear that a bigger retirement lump sum means giving up some pension. The pension itself is explained in final salary pensions.

Your next step

A defined benefit lump sum uses the lump sum allowance, the pension income does not, and the scheme's commutation factor decides how much pension a given sum costs. Your scheme can state the largest lump sum on offer and the allowance it would use. Whichever way you lean, the form on this page asks little and costs nothing. Afterwards, an FCA-authorised adviser phones to discuss the lump sum alongside your other pensions and tax.

Sources, read 20 October 2026: GOV.UK, Lump sum allowance; legislation.gov.uk, ITEPA 2003 s637P and Finance Act 2004 Sch 29 para 2C; HMRC Pensions Tax Manual, PTM063220, PTM063230, PTM063240, PTM063210, PTM171000, PTM173000; NHS Business Services Authority, Lump sum allowances from 6 April 2024 and the 1995/2008 guide for members (print code V25 05.2024).