Pension tax 12 May 2026 6 min read

Pension crystallisation explained: the 25% tax-free and what happens to the rest

“Crystallisation” sounds like a technical term that exists to make pension paperwork harder to read. In practice it's a single act: the moment a chunk of your pension becomes live for drawdown, gets split into a 25% tax-free portion and a 75% taxable portion, and starts being counted against your Lump Sum Allowance.

What crystallisation actually does

A UK personal pension or SIPP starts life uncrystallised: the whole pot is sitting in the wrapper, growing tax-free, and not yet earmarked for income. You haven't decided to take anything out.

When you decide to crystallise - either an explicit choice you make with your provider, or implicitly via taking a withdrawal - three things happen to the crystallised portion:

1. 25% becomes tax-free cash (the “pension commencement lump sum”, or PCLS, in the older language). You can take it out of the pension wrapper entirely, or leave it in.
2. 75% becomes a crystallised pot inside the pension. It's still invested and still growing tax-free, but it's now labelled as crystallised, which changes its tax treatment when you draw from it later.
3. The 25% portion counts against your Lump Sum Allowance - the £268,275 lifetime cap on tax-free cash from UK pensions.

You don't have to crystallise the whole pot at once. Most people don't. You can crystallise £50,000 today, another £100,000 next year, another £200,000 five years later, and so on. Each crystallisation event applies the 25/75 split to that chunk only.

Where can the 25% tax-free cash go?

Four common destinations for the tax-free portion:

• Cash ISA. Drops the money straight into a tax-free wrapper outside the pension. Continues to grow free of UK income tax and CGT. Subject to the £20,000 annual ISA contribution limit, so for large lump sums you'll spread the move across multiple tax years.
• Stocks & Shares ISA. Same as above but invested rather than held as cash. Same £20,000 annual limit. Compounding tax-free over a long retirement adds up.
• Current account / cash. Just take it out. Use it for spending, mortgage payoff, or one-off purchases. After the move, the money is in your normal estate - potentially in scope for IHT and any returns on it are taxable.
• External / one-off expense. Effectively the same as “current account then spend it”, but mentally cleaner if the money is earmarked for a specific purchase (e.g. clearing a mortgage). In the Excelergy planner this is the External destination - the money leaves the model entirely.

The destination doesn't affect the LSA tracking - the 25% counts against your £268,275 either way, regardless of where it ends up. It does affect everything else: tax efficiency, IHT, and what's available for income later.

What happens to the 75%

The 75% taxable portion sits in your crystallised pot, still inside the pension wrapper. From this point on:

• It continues to grow tax-free, just like the uncrystallised pot did.
• When you draw from it, every withdrawal is taxed as income at your marginal rate - there's no further 25% tax-free portion (you already took that at crystallisation).
• Income tax applies under the standard UK bands (20% / 40% / 45%) or the Scottish equivalents (19% / 20% / 21% / 42% / 45% / 48%) on non-savings, non-dividend income. National Insurance does NOT apply to pension income.

A common pattern: crystallise some pension, take the 25% tax-free up front, leave the 75% in the crystallised pot to grow, then start drawing from it a few years later when you've spent down the tax-free cash. The model handles this naturally - the crystallised pot grows alongside the uncrystallised one until you start drawing.

Why people delay crystallising

There's no rule that says you have to crystallise at retirement. Pension access age is currently 55 (rising to 57 in 2028), and you can crystallise any time from then onwards. Reasons people delay:

• Marginal-rate management. Crystallising the 75% portion creates a future stream of taxable income. If you've got other taxable income today (e.g. you're still working), waiting until that income drops can mean drawing the 75% at the basic rather than higher rate.
• IHT positioning. Uncrystallised pension is currently outside your estate for IHT. Once you crystallise and the tax-free cash leaves the wrapper, that portion becomes part of your estate. Delaying preserves the IHT efficiency.
• LSA preservation. Your £268,275 LSA is finite. If you crystallise early and don't need the tax-free cash yet, you've used part of the cap for no immediate benefit.

On the other side, reasons people do crystallise early:

• A specific lump-sum need (mortgage payoff, house deposit for a child, large purchase).
• Wanting the tax-free cash moved into an ISA for tax-efficient growth on the way to a later retirement.
• Concerns about future legislative change to the 25% rule (governments occasionally float reducing it).

Crystallisation events in Excelergy

The planner models crystallisation in two ways:

• Automatic crystallisation. When you need income in retirement and your crystallised pot can't cover it, the engine crystallises just enough uncrystallised pension to fill the gap. By default the 25% tax-free portion is consumed as income that year (the standard UFPLS pattern), and the 75% goes into the crystallised pot to be drawn from in future years. You can also redirect the auto-crystallised tax-free portion to a Cash ISA, Stocks ISA, or Current Account via the Auto-cryst TFC setting in the Spending card (Advanced view) - useful for modelling the common “move 25% to ISA each year” strategy. ISA destinations respect the £20,000 annual allowance; overflow falls to the Current Account. You can see this in the ledger under the Auto-cryst column.
• Manual crystallisation events. If you want to model an explicit one-off choice - “crystallise £200,000 at age 60 and move the £50,000 tax-free cash to a Stocks ISA” - you add it in the Event card. Choose Type: Crystallise Pension, set the age and amount, and pick the destination for the tax-free portion.

The two approaches can coexist. Add events for the lump-sum decisions you're modelling deliberately; let the engine handle the year-by-year top-up crystallisations (with Auto-cryst TFC set to wherever you want the recurring 25% to land).