On retirement you can exchange some of your pension for a cash lump sum, this is known as commuting your pension or commutation.
You must give written notice to your FRA, no earlier than four 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 (including any Additional Pension Benefit) you would like to exchange for lump sum.
If you are entitled to a higher tier ill-health award, you are not allowed to exchange any part of the higher tier ill-health pension.
You can exchange as much or as little as you like, as long as it is not more than one quarter (25%) of your pension.
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 starts.
HM Revenue and Customs limit the amount of lump sum which a pension scheme member can receive tax-free. The limit is most likely to be exceeded if your commutation factor is greater than 20. However, when your pension becomes due, the FRA's pension administrator will be able to tell you how much you can exchange while remaining within the tax limits.
Example of how a commuted lump sum is worked out
A special firefighter is entitled to a pension of £8,000 and is aged 57 years and 7 completed months on the day his pension starts. The relevant commutation factor is 19.8.
They choose to exchange the maximum amount of pension, in this case, one quarter.
The pension before commutation is £8,000 a year.
The lump sum will be: £8,000/4 x 19.8
= £2,000 x 19.8
= £39,600 one off payment
The pension after commutation will be: £8,000 - £2,000
= £6,000 a year