Glossary · UK
What is Pension Commutation?
Giving up part of a regular pension income in exchange for a cash lump sum, usually the tax-free lump sum taken at retirement.
Full Definition
Pension commutation means exchanging some of your future pension income for a one-off cash lump sum. It most commonly arises in defined benefit (final salary) schemes, where you can give up part of the annual pension to receive a tax-free lump sum - the amount of pension surrendered is set by the scheme's commutation factor, which converts each GBP 1 of pension given up into a fixed amount of cash. In money purchase pensions, the equivalent is taking part of the pot as a tax-free lump sum, normally up to 25%, with the rest providing income. A separate rule, trivial commutation, can let savers take a very small total pension as a lump sum. Commutation matters because the trade-off is permanent: more cash now means lower guaranteed income for life. Whether it is worthwhile depends on the commutation factor offered, your health, other income, and how you value flexibility against certainty.