Swapping DB pension for a tax free lump sum

Q: Are there other ways to take cash from a DB scheme?

Using AVCs. If you have additional voluntary contributions in the same scheme, the scheme can let you take your whole PCLS from the AVC fund and leave the DB pension uncommuted (PTM063220). If your scheme's commutation factor is poor, this keeps more guaranteed pension. Trivial commutation. GOV.UK explains that if all your private pensions are worth £30,000 or less you may be able to take the whole amount as a lump sum, usually from a DB pension, with 25% tax free if the pension has not already been accessed. Pension credits. A disqualifying pension credit, created from an ex spouse's pension already in payment, cannot support a PCLS (PTM063230).

Most defined benefit (DB) schemes pay tax free cash by letting you give up part of your pension at a commutation factor, such as £15 of cash for each £1 a year of pension surrendered. Tax law caps the tax free amount at a quarter of the lump sum plus 20 times the remaining pension, and at your unused lump sum allowance. Whether the swap is worth it depends mainly on the factor your scheme offers, how long you expect to draw the pension, and what you lose in increases and dependants’ benefits.

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What does commutation mean in a DB scheme?

A DB scheme promises a scheme pension rather than a pot of money. Some schemes build in a separate lump sum alongside the pension, so nothing has to be given up; HMRC’s Example 5 at PTM063240 describes exactly that. Many others offer cash only by commuting part of the pension: you choose a lump sum and the annual pension is reduced to pay for it.

The rate of exchange is the commutation factor. HMRC describes a factor of 15:1 as giving up £1 of annual pension for every £15 of lump sum paid (PTM063240). The factor is chosen by the scheme, not by HMRC, and it can differ widely from one scheme to another. What tax law does is limit how much of the resulting cash can be paid tax free.

How much can be taken tax free?

A tax free lump sum paid with a pension is a pension commencement lump sum (PCLS). Its permitted maximum is the lowest of the applicable amount, your available lump sum allowance and your available lump sum and death benefit allowance (PTM063230). The lump sum allowance is £268,275 for most people (PTM171000), and every PCLS uses it up.

For a DB scheme pension, paragraph 2C Schedule 29 Finance Act 2004 sets the applicable amount as:

(A + (B × C) − D) ÷ 4

A is the lump sum paid.
B is 20, the relevant valuation factor in section 276 Finance Act 2004.
C is the pension payable in the first 12 months, measured after commutation.
D is a deduction for any disqualifying pension credit from a divorce.

Because the lump sum and the reduced pension move together, HMRC gives a direct equation for the largest PCLS when pension is commuted: 20fg ÷ (20 + 3f), where f is the scheme’s commutation factor and g is the full pension before commutation (PTM063240). In HMRC’s Example 7, a £30,000 pension commuted at 15:1 allows a maximum PCLS of £138,461, leaving a pension of £20,769 a year.

Any lump sum above the permitted maximum is not a PCLS. Unless it falls within another authorised category, it is an unauthorised payment (PTM063210), so schemes cap the cash at the tax limit.

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How does the factor change the outcome?

Illustration only. A member is entitled to a full pension of £20,000 a year and has plenty of lump sum allowance left. Using HMRC’s equation:

Commutation factor	Maximum tax free cash	Pension given up	Pension left
12:1	£85,714	£7,143	£12,857
20:1	£100,000	£5,000	£15,000

Check the 12:1 row against the statutory formula: (£85,714 + 20 × £12,857) ÷ 4 is about £85,714. A higher factor gives more cash and costs less pension, so a generous factor makes commutation more attractive and a low factor makes it expensive.

How should the trade off be judged?

Start with a simple break even. At 12:1, each £12 of cash costs £1 a year of gross pension, so the cash equals 12 years of the pension surrendered before tax. The pension is taxable income and the lump sum is not, so the comparison should be after tax. For a basic rate taxpayer, £7,143 of gross pension is worth £5,714 after 20% tax, and £85,714 of tax free cash equals about 15 years of that net pension. For a higher rate taxpayer the net pension given up is £4,286, so the after tax break even stretches to about 20 years.

Then weigh the points the break even ignores:

Increases. If the pension given up would have risen each year, the true value of what you surrender is higher than the starting figure.
Dependants. Check whether a spouse’s or partner’s pension is based on the pension before or after commutation. Scheme rules differ.
Health and life expectancy. Someone in poor health gains more from cash now; someone with long life expectancy gains more from the pension.
Use of the cash. Clearing a mortgage or other debt can beat the implied return; leaving cash idle usually does not.
Tax band. Commuting reduces taxable pension, which can keep total income below a higher rate threshold. The 2026 to 2027 bands are in UK tax rates and thresholds.

How is the pension that remains taxed?

GOV.UK confirms that the tax free lump sum does not affect your Personal Allowance, while the pension itself is taxable income, usually taxed under PAYE by the scheme. It is added to any salary, State Pension and other income, so commuting can lower the marginal rate on the rest. See how State Pension is taxed for how the two interact through your tax code.

When can the lump sum be paid?

A PCLS must be linked to a pension coming into payment under the same scheme, paid within an 18 month window running from 6 months before to 12 months after entitlement arises, and paid once you have reached normal minimum pension age, unless you are retiring through ill health or have a protected pension age (PTM063210). Normal minimum pension age is 55 and rises to 57 from 6 April 2028 (PTM062100); see normal minimum pension age.

Are there other ways to take cash from a DB scheme?

Using AVCs. If you have additional voluntary contributions in the same scheme, the scheme can let you take your whole PCLS from the AVC fund and leave the DB pension uncommuted (PTM063220). If your scheme’s commutation factor is poor, this keeps more guaranteed pension.
Trivial commutation. GOV.UK explains that if all your private pensions are worth £30,000 or less you may be able to take the whole amount as a lump sum, usually from a DB pension, with 25% tax free if the pension has not already been accessed.
Pension credits. A disqualifying pension credit, created from an ex spouse’s pension already in payment, cannot support a PCLS (PTM063230).

What mistakes come up most often?

Thinking the tax free limit is 25% of a transfer value. For a DB pension the test uses the statutory factor of 20, not the scheme’s transfer value or its own factor.
Comparing the cash with the gross pension given up and ignoring increases and dependants’ benefits.
Forgetting that a PCLS uses up the lump sum allowance for any later pension.
Moving money purchase funds into a DB arrangement to inflate the applicable amount. Paragraph 3B Schedule 29 treats the gain as an unauthorised payment (PTM063240).
Asking for more cash than the permitted maximum and assuming the excess is still tax free.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.