Pensions

Tax free lump sum FAQs

Answers to the following frequently asked questions about lump sum payments:

ArrowWill I get a lump sum on retirement?
ArrowWho is eligible to commute pension for lump sum?
ArrowWhen will my lump sum be paid?
ArrowWhat is commutation of pension benefits?     
ArrowHow much lump sum can I access?
ArrowHow do I elect to commute pension to lump sum?
ArrowIs my lump sum always tax-free?
ArrowBefore every Budget there are rumours that the lump sum will be taxed.  Is this likely? 
ArrowCan I give up my tax-free lump sum for additional annual index linked pension benefits?
ArrowI have made my commutation decision and have now been advised of a revised award increasing my benefits. Can I make another commutation choice now?
ArrowIf I die in service will my survivor receive my tax-free lump sum in addition to the death in service payment?

 

 

Will I get a lump sum on retirement?

If you are a member of the 1995 section of the NHS pension scheme you will automatically be entitled to a standard lump sum of 3 times your pension.  There are limited circumstances when your lump sum may not equate to 3 times your pension and these are detailed below.

If you are a member of the 2008 section of the NHS pension scheme you will not automatically receive a lump sum on retirement.  Instead, you may be able to 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.

If you switched to the 2008 section via the Choice exercise then you will be obliged to access the Mandatory Lump Sum, which is the amount of lump sum you had accrued in the 1995 section on the date of your transfer to the 2008 section (31 March 2008).  In addition, you may be able to access a bigger lump sum by giving up additional annual pension as detailed above.

 

Who is eligible to commute pension for lump sum?

As long as you have made contributions to the NHS pension scheme since 1 April 2008 you are eligible to commute.

 

When will my lump sum be paid?

Your lump sum is usually paid to you the day after your retirement, providing you have completed the application for retirement benefits form in good time.

 

What is commutation of pension benefits?    

This is the option to access a retirement lump sum, or to increase your standard or mandatory lump sum by forgoing £1 of pension for £12 of lump sum.  This is known as commuting your pension in favour of a retirement lump sum.

Regardless of which section of the NHS pension scheme you belong to you are entitled (since 1 April 2008) to access a maximum lump sum which equates to the HMRC maximum of 25% of your pension fund value or 25% of the standard life time allowance at the time of retirement (if lower).

In the 1995 section this maximum amount can be estimated by multiplying your pension by a factor of 5.36.  The automatic lump sum is included when calculating the 25% total available to you.

In the 2008 section this maximum amount can be estimated by multiplying your pension by a factor of 4.28.   Any Mandatory Lump Sum is also included when calculating the 25% total available to you.

 

How much lump sum can I access?

If you are in the 1995 section you are entitled to access anything between the automatic lump sum and the maximum available to you of 25% of your fund value or 25% of the standard lifetime allowance at the time of retirement (if lower).

If you are in the 2008 section you are entitled to access anything up to 25% of your fund value or 25% of the standard lifetime allowance at the time of retirement (if lower).

 

How do I elect to commute pension to lump sum?

The decision to commute is made at the time of completing your retirement application form.

 

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 the lifetime allowance (whichever is the lesser).

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. Details of the amount available tax-free will be detailed on your lump sum protection certificate.

If you have Fixed Protection you are entitled to access 25% of your protected (fixed) Lifetime Allowance.

From April 2014, 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.

 

Before every Budget there are rumours that the lump sum will be taxed.  Is this likely?

We cannot predict what legislation any government may choose to implement and technically it is possible that a future government could choose to collect revenue in this way.

However, as the NHS pension scheme operates on the principle of ‘commuting’ benefits, whereby only the 1995 section and 2008 ‘Choice’ optants are provided with an automatic lump sum, it relies on members choosing to access greater lump sum benefits.

If you choose to access extra lump sum in exchange for the index-linked annual pension then the scheme benefits by discharging an immediate liability instead of retaining an ongoing liability to pay the annual pension, index-linked for life.  This is because the scheme simply pays a one-off lump sum as opposed to an index-linked annual pension for life.  It is, therefore, cheaper for the scheme to pay you a lump sum rather than an ongoing pension.

If the government were to decide to tax the lump sum, presumably fewer people would choose to access benefits in this way.  The scheme would then retain a greater liability for paying ongoing pension benefits and the scheme would be more ‘expensive’ as a result of this.   

 

Can I give up my tax-free lump sum for additional annual index linked pension benefits?

No.  It is not possible for you to ‘commute’ lump sum in favour of greater annual pension.

 

I have made my commutation decision and have now been advised of a revised award increasing my benefits. Can I make another commutation choice now?

No.  The general option to exchange part of your pension for lump sum is to be exercised at the time of claiming your pension. For that reason you will not have a second opportunity to make a decision about commutation should 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.

 

I have made my commutation decision but have changed my mind.  Can I do something about this?

You will need to contact the relevant pensions agency quickly and certainly before they start processing your retirement benefits in order to be able to amend an election that you have made.

 

If I die in service will my survivor receive my tax-free lump sum in addition to the death in service payment?

No. Please refer to our FAQ on Death in Service for details of the benefits in this instance.

Pensions help

Pensions are a complex and changing issue for doctors.  We produce comprehensive guidance and run expert seminars to keep you up to date.

ArrowFind out how we support you

Contact us on pensions

We are happy to help if you can't find the pension information you need.

Arrow Contact the Pensions Department