Since 2015 it has been possible to convert all of your pension pot into a cash lump sum. It has always been possible to take 25% of your pension pot as a tax-free lump sum but now everybody can take the remaining 75% of their pension pot as a cash sum, but it will be taxed at your marginal rate.
There are two ways in which you can take cash from your pension:
UFPLS is a payment option which allows your insurance company to pay you a chunk of your pension pot as a cash sum when you reach retirement age (normally any time after age 55). It is taxed in the normal way; 25% tax free and 75% taxed at your marginal rate.
You can take a series of UFPLS payments spread over several tax years in order to reduce your tax bill.
Taking a UFPLS will trigger the Money Purchase Annual Allowance (MPAA). This can be complex, but if you take more than 25% of your pension pot (e.g UFPLS) or take income from a flexi-access drawdown plan, and you are still paying into a money purchase pension, the MPAA will apply.
You will be subject to a tax charge if your total money purchase pension contributions exceeds £4,000 per tax year.
Top Tip - The most important thing to understand about cash sums taken over your tax-free amount is that they will be taxed as income at your marginal rate. Therefore, if you take a large cash sum you could end up paying higher rate tax. Remember that your provider will deduct tax at source, which means that you will only receive the after-tax amount.