On retirement, if you wish, you can give up part of your annual entitlement to pension to receive a one-off lump sum payment. This is called "commutation" or “commuting your pension”.
There are limits, however, on the amount which can be commuted. The commuted portion of pension must not be more than 25%, nor be such that the resultant lump sum exceeds certain tax limits, resulting in a scheme chargeable payment. By staying within these limits, the lump sum by commutation will be tax free. At the time of retirement your pension administrator can advise you of current limits.
Also, although a retirement, deferred or lower-tier ill-health pension can be commuted, a higher tier ill-health pension cannot.
If you wish to use this option to provide a lump sum, you must give written notice to the fire authority before the first payment of pension is made, setting out the amount of your pension that you wish to commute. You can commute as little or as much as you like, provided you do not exceed the limits.
For every £1 by which the annual rate of pension is reduced, you would receive £12 as a lump sum.
Suppose, for example, that you are entitled to a retirement pension of £16,000 a year and you choose to commute the maximum portion of one quarter, i.e. £4,000. Assuming this is permitted within tax limits, your total benefits would be:
Pension: £16,000.00 - £4,000.00 = £12,000.00 a year
Lump sum: £4,000.00 x 12 = £48,000.00