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, before the first payment of pension is made, stating how much of your pension 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, or reduced pension if you have chosen to receive it early.
For each £1 of pension that you give up, you get £12 as lump sum.
HM Revenue and Customs limit the amount of lump sum which a pension scheme member can receive tax-free. If it looks likely that you are going to exceed the limit, your 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
If you were entitled to a pension of £16,000 a year and you chose to exchange the maximum of one quarter, this would be £4,000. Your total benefits would be:
Pension: £16,000 - £4,000 = £12,000.00 a year
Lump sum: £4,000 x 12 = £48,000 one off payment