Pension Commutation Calculator 2025/26
Calculate the trade-off between your DB pension income and a tax-free lump sum. Compare commutation factors, break-even years, and see whether taking cash or keeping your full pension is better for your retirement.
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How to Use This Calculator
Commutation Trade-Off tab
Enter your annual pension before commutation, the commutation factor from your scheme (typically 12:1 to 20:1), and the percentage you want to commute (max 25% of capital value). The calculator shows the tax-free lump sum you will receive, the reduced annual pension, and the break-even point in years. Expand "More options" to include State Pension and other income for accurate tax calculations.
Tax Comparison tab
Compare the value of a tax-free lump sum (invested) against the taxable pension income you give up. See the net value over 10, 20, and 30 years with investment returns on the lump sum. Choose your marginal tax rate in retirement to see how tax affects the comparison.
Full vs Reduced Pension tab
Compare three scenarios side by side: no lump sum (full pension), max lump sum (maximum commutation), and partial lump sum (50% commutation). See net income after tax and total value including invested lump sum growth over 10, 20, and 30 years.
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The Formula
Pension commutation trades guaranteed annual pension income for a tax-free lump sum. The key calculation:
Annual Pension Reduction = Lump Sum ÷ Commutation Factor
Capital Value = Annual Pension × 20 (for LSA purposes)
Max Tax-Free Lump Sum = min(25% of Capital Value, £268,275)
Break-Even (Gross) = Lump Sum ÷ Annual Pension Foregone
Break-Even (After Tax):
Net Foregone = Pension Reduction − Tax Saving from Lower Pension
Break-Even = Lump Sum ÷ Net Foregone
Example: £20,000 pension, 15:1 factor, 25% commutation
Capital Value = £20,000 × 20 = £400,000
Max PCLS = 25% × £400,000 = £100,000 (within LSA)
Pension Reduction = £100,000 ÷ 15 = £6,667/year
Gross Break-Even = £100,000 ÷ £6,667 = 15 years
The commutation factor determines how much lump sum you get per £1 of pension given up. A factor of 15:1 means £15 of lump sum per £1/year of pension sacrificed. Higher factors make commutation more attractive.
The after-tax break-even is typically longer than the gross break-even because the lump sum is tax-free while the pension income would have been taxed. Higher-rate taxpayers see a larger gap between gross and net break-even, making commutation relatively more attractive.
Example
David — Retired Civil Servant, 60, Leeds
David has a civil service pension of £20,000/year and is offered a commutation factor of 15:1. He wants to understand whether to take a lump sum or keep his full pension.
Commutation Trade-Off tab
The after-tax break-even is longer because the £6,667 pension would have been partially tax-free (personal allowance) and partially taxed at 20%. The lump sum is entirely tax-free. If David lives past 78 (age 60 + 18.7 years), keeping the full pension would have been worth more. But he gets immediate access to £100,000 tax-free.
Tax Comparison tab
David checks what happens if he invests the £100,000 lump sum at 5% per year:
At a 5% return, David's invested lump sum significantly outperforms the cumulative foregone pension over 20 years. However, the pension income is guaranteed for life and typically inflation-linked, while investment returns are not.