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What is the meaning of a commuted pension?

Pension commutation means giving up all or part of one or more of your pensions in exchange for an immediate lump sum and a smaller pension.

The approximate amount that can be taken as a lump sum is 25 per cent of the pension fund, but the scheme actuary will calculate actual commutation factors based on the type of scheme, your age and other considerations. There are also circumstances in which you may be able to take more than 25 per cent as a lump sum.

Trivial commutation

If the total capital value of all your pensions is under £18,000, you may commute them all in full. As with any other commutation, 25 per cent is tax free and the rest is taxed as income in the year in which it's paid. You can only opt for this on or after your 60th birthday and all pensions you wish to commute must be fully commuted within 12 months of the date you commute the first of them.

Serious ill health

If your life expectancy is less than one year, you may commute 100 per cent of your pension fund. You may also commute pension schemes under Guaranteed Minimum Pension rights as long as there is enough left in the fund to provide for a pension for your spouse or civil partner.

Small pension pots

If you have several small pension funds valued at less than £2,000 each, you may commute up to two of them. The first 25 per cent will be paid free of income tax but the remainder is treated as taxable income in the year in which it's paid. As with all commutations, be aware that this may affect your tax position if it takes you into the next tax bracket.


Whether or not to commute all or part of your pension is a personal choice.

Do you prefer the freedom of a tax-free lump sum to invest or spend, or the security of a pension that will be paid for the rest of your life? Take into account that you will lose any inflation-linked increases on the commuted part of your pension, but your investments may get a better return than your pension fund managers can achieve.

State pension deferral

While not strictly commutation, you may choose to defer receipt of your state pension for a minimum of one year and receive a lump sum in exchange. Deferrals for shorter periods will provide an increase in pension of one per cent for each five weeks the pension is deferred after your official retirement age.