BACKGROUND: Free-water imaging can predict and monitor dopamine system degeneration in people with Parkinson's disease. It can also enhance the sensitivity of traditional diffusion tensor imaging (DTI) metrics for indexing neurodegeneration. However, these tools are yet to be applied to investigate cholinergic system degeneration in Parkinson's (which involves both the pedunculopontine nucleus (PPN) and cholinergic basal forebrain (cBF)). METHODS: Free-water imaging, free-water-corrected DTI, and volumetry were used to extract structural metrics from the cBF and PPN in 99 people with Parkinson's and 46 age-matched controls. Cognitive ability was tracked over 4.5-years. RESULTS: Pearson's partial correlations revealed that free-water-corrected DTI metrics in the PPN were associated with performance on cognitive tasks that required participants to make rapid choices (behavioural flexibility). Volumetric, free-water content and DTI metrics in the cBF were elevated in a sub-group of people with Parkinson's with evidence of cognitive impairment, and linear mixed modelling revealed that these metrics were differently associated with current and future changes to cognition. CONCLUSIONS: Free water and free-water-corrected DTI can index cholinergic degeneration that could enable stratification of patients in clinical trials of cholinergic interventions for cognitive decline. In addition, degeneration of the PPN impairs behavioural flexibility in Parkinson's, which may explain this region's role in increased risk of falls.