Pension commutation – increasing your lump sum

Under the NHS Pension Scheme (Amended April 2008) members will have a new option to give up some of their annual pension for an additional tax free lump sum, up to a maximum amount permitted under HMRC rules. This new provision is known as “pension commutation”.

Pension is converted to lump sum at the rate of £12 additional lump sum for every £1 of pension given up. A calculator tool is available on this website to help members model the amount of additional lump sum they can claim.

Claiming a bigger lump sum does not affect the level of survivor benefits payable to a partner or dependent child.

Members of the New NHS Pension Scheme will have the same opportunity to give up part of their pension for a tax free lump sum of up to 25% of pension value or keep all their entitlement as pension – in other words, they can opt to take no lump sum at all.

Example of pension commutation:

Member A has 40 years membership and retires on a pensionable pay of £40,000. Standard benefits are a pension of 40/80 x £40,000 = £20,000 per annum and a standard lump sum of £60,000 (annual pension x 3).

An additional lump sum up to a maximum of £47,142 (33/14* x £20,000) is available. If member A wanted to take this maximum additional lump sum, they would need to give up £3,928 of pension (£47,142 / 12). Member A's benefits would then be a pension of £16,072 (£20,000 - £3,928) and a lump sum of £107,142 (£60,000 + £47,142).

Any amount of additional lump sum (in multiples of £12) up to a maximum of £47,142 can be claimed by Member A. In all cases the amount of survivor pension would be the same.

Members retiring from 2 April:

Members retiring from 2 April 2008 (the first day members can retire under the terms of the amended scheme) must indicate whether or not they want an additional lump sum by ticking the appropriate box on the new form AW8(T)(2008).

If they want an additional lump sum they must select either the maximum lump sum permitted or state an additional lump sum in whole pounds (multiples of £12 only), which is not greater than the permitted maximum lump sum.

* 33/14 is the factor used to calculate the lump sum for most members. Exceptions would be married
male members with membership prior to March 1972 who have not bought ‘unreduced lump sum’.