Calculating your pension lump sum

This guidance answers all your queries on the lump sum you receive at retirement from your NHS post – how much you will get, how much will get taxed and what commutation is.

Location: UK
Audience: All doctors
Last reviewed: 11 November 2021
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Am I entitled to a lump sum on retirement?

1995 section or you opted to move to the 2008 section

You will automatically be entitled to a standard lump sum of three times your pension. Or, a mandatory lump sum based on benefit accrual on moving to the 2008 section.

The lump sum will be less than three times the pension for:

  • married men with service prior to 25 March 1972
  • women who opted for a bigger widower’s pension
  • individuals who opted for increased dependents benefits in the 1995 section, unless an unreduced lump sum has been purchased.

Further to the legal decision in the Goodwin case, all survivor benefits for spouses and civil partners are to be equalised from 1 December 2005. Any purchases relating to bullet points 2 and 3 above (for deaths occurring after that date) should be reimbursed.

2008 and 2015 sections

Whilst there is no standard lump sum, you can choose whether to access a lump sum by giving up some of your annual pension at a rate of £1 of pension for £12 of lump sum. This is known as commutation of benefits.

 

When your lump sum will be paid

  • Your lump sum is usually paid to you the day after your retirement, providing you have completed the application in good time.
  • If you are retiring from the NHS pension scheme (England and Wales) the payment of your lump sum will be made within 30 days of your retirement date.
  • If the payment is made outside of 30 days interest may be payable.

 

Commutation of pension benefits

When you come to make your application for retirement, you will decide if you want to commute annual pension in favour of a lump sum.

Commutation is the option to access a retirement lump (2008 section and 2015 scheme members) or an increased lump sum (1995 section members)by forgoing £1 of index linked pension for £12 of lump sum.

While it can be tempting to take a lump sum, you will need to weigh up the benefits and consider the value for money. For example, for every £12,000 of lump sum you take, you give up £1,000 index linked annual pension for life.

If you have separate benefits in the 1995 and/or 2008 sections and in the 2015 scheme, you are able to make separate decisions about the commutation of benefits. This does not apply when accessing benefits on the grounds of ill health retirement in England and Wales.

 

Maximum lump sum

1995 section

This maximum amount available is 25% of the capital value of your benefits and can be estimated by multiplying your pension by 5.36. The automatic standard lump sum is included when calculating the 25% total available to you.

For example, if you have a pension of £25,200 and a standard lump sum of £75,600, the lump sum could be maximised as follows:

£25,200 x 5.36 (commutation factor for 1995 section) = £135,072 approximate maximum lump sum

£135,072 - £75,600 (basic lump sum) = £59,472 maximum additional lump sum

£59,472/12 = £4,956 reduction in annual pension required to fund this.

2008 section and 2015 scheme

This maximum amount available is 25% of the capital value of your benefits and can be estimated by multiplying your pension by 4.28. Any 2008 section choice mandatory lump sum is also included when calculating the 25% total available to you.

For example, if you have a pension of £33,660 the lump sum could be maximised as follows:

£33,660 x 4.28 (commutation factor for 2008 section and 2015 scheme) = £144,060 approximate maximum lump sum (rounded down to the nearest number divisible by 12)

£144,060/12 = £12,005 reduction in annual pension required to fund this.

If the maximum lump sum of £144,060 was taken the annual pension would be reduced to £21,655 (£33,660 less £12,005).

For a 2008 choice optant, the calculation of the maximum lump sum would be based on 4.28 of the standard pension, deducting the mandatory lump sum, to give the additional amount of pension available.

It is not necessary to take the maximum lump sum; it is possible to access any amount of lump sum up to the maximum of 25% of the total pension value, by giving up a part of the annual pension as detailed above.

 

Is my lump sum always tax-free?

You are entitled to a tax-free lump sum equivalent to the lesser of:

  • 25% of your pension fund value, or
  • 25% of your available standard lifetime allowance (whichever is the lesser).

The standard lifetime allowance is set to remain at £1,073,100 until April 2026.

Lump sum benefits up to this level are tax-free.

If you have a lump sum protection certificate (certified by HMRC) you will be able to access a greater tax-free lump sum than that specified above.

If you have individual protection you are entitled to access 25% of your protected (individual) lifetime allowance.

If you have fixed protection you are entitled to access 25% of your protected (fixed) lifetime allowance.

If you have enhanced or primary protection you are entitled to access 25% of £1.5m as your lump sum before any tax charges will apply.

Any lump sum which exceeds this limit would be subject to 55% lifetime allowance charge.

 

Is the lump sum likely to ever be taxed in future?

While we can’t predict what any Governments may announce in future, it is in the Government’s interest for people to take their pensions in a lump sum.

​If the Government were to decide to tax the lump sum, presumably fewer people would choose to access benefits in this way. With fewer people opting for lump sums, the scheme would retain a greater liability for paying ongoing index linked pension benefits and would be more ‘expensive’ as a result of this.

 

Making another commutation choice

Your pension commutation options are:

  • taking standard benefits (no commutation)
  • taking the maximum tax free lump sum only (increasing it to the lesser of 25% of the standard lifetime allowance/personal lifetime allowance or the capital value of your benefits)
  • taking the maximum lump sum (only available if you are able to take a lump sum of more than 25% of the standard lifetime allowance/personal lifetime allowance
  • taking an amount specified by you up to the maximum lump sum possible.

The option to exchange part of your pension for lump sum must be made at the time of claiming your pension. For that reason you will not have a second opportunity to make a decision about commutation even if a substitute award be made.

The approach taken by the NHS pensions agencies is:

  • if when claiming the pension you opted to take the maximum lump sum, the pensions agencies will apply that decision to all substitute awards
  • if when claiming the pension you opted to commute a fixed amount (or nothing at all), there will be no further commutation on the additional pension resulting from the substitute award.

If you change your mind, you will need to contact the relevant pensions agency quickly and certainly before they start processing your retirement benefits.

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