On retirement, you can elect to take a lump sum in addition to a pension. This is known as commutation.
You must give written notice to your authority, no earlier than 4 months before your intended retirement and no later than the day before your pension is due to come into payment stating how much of your pension should be converted into a lump sum subject to the permitted limit as detailed below.
You can commute as much or as little as you like provided that you do not exceed the permitted limit.
The limit depends upon the circumstances of your retirement as follows:
|Circumstances of retirement||Limit|
The amount provided as a lump sum is decided by factors provided by the Scheme Actuary. The factor used will depend upon your age in completed years and months on the day your pension commences. Unlike previous factors which reflected whether the firefighter was male or female, current factors are “unisex”.
Please be aware that HM Revenue and Customs limit the amount of lump sum which you can receive tax-free. The limit is most likely to be exceeded if the relevant commutation factor is greater than 20. However, when your pension becomes due, the authority’s pensions administrator will be able to tell you how much you can commute while remaining within the tax limits.
Example of calculation of commuted lump sum
A firefighter born on 10 October 1957 has a last day of service of 17 May 2015. He has completed 30 years of service and is entitled to the immediate payment of his pension.
He elects to commute the maximum amount which, in his case, can be one quarter.
His pension before commutation is £20,000 a year.
On the day his pension commences his age will be 57 years and 7 completed months; the relevant commutation factor is 20.6.
His lump sum will be: £20,000/4 x 20.6
= £5,000 x 20.6
His pension after commutation will be: £20,000 - £5,000
= £15,000 a year