When the time has come to retire, you can choose to give up part of your annual entitlement to pension to receive a one-off lump sum payment in return. This is called commutation.
However, there are limits on the amount that can be commuted. The commuted portion of pension must not be more than 25%, and it should not exceed certain tax limits. This would result in a scheme chargeable payment. By staying within these tax limits, the lump sum by commutation will be tax free. You can find out more about the tax limits by contacting your pension administrator.
Please note that deferred or lower-tier ill-health pension can be commuted, however, a higher tier ill-health pension cannot.
If you wish to take up for 25% of you pension as a lump sum, you must give written notice to the authority before the first payment of pension is made. In this written notice, you should clearly set out the amount of pension that you wish to commute. You can commute as little or as much as you like, provided you do not exceed the limits mentioned above.
Conversion rate for commutation
For every £1 that the annual rate of pension is reduced by, you would receive £12 as part of the lump sum.
For example, if you’re entitled to a retirement pension of £16,000 a year and you choose to commute the maximum portion of 25%, i.e. £4,000. Assuming this is permitted within tax limits, your total benefits would be as follows:
|£16,000.00 – £4,000.00 = |
£12,000.00 a year
|£4,000.00 x 12 = £48,000.00|