What a commutation factor actually is
In plain terms, a commutation factor is the exchange rate the scheme uses when you decide to give up some of your yearly pension in return for a one-off tax-free cash lump sum. "Commutation" is just the technical word for that swap: you trade a slice of guaranteed annual income for cash up front. The factor is the number of pounds of lump sum you receive for each pound of annual pension you hand over.
On AFPS 15 the factor is fixed at 12:1. That means for every £1 of yearly pension you surrender, you get £12 of tax-free cash. Give up £1,000 a year of pension and you walk away with a £12,000 lump sum, but your pension for the rest of your life is £1,000 a year lower. The factor never changes with the markets or interest rates on AFPS 15; it is set scheme-wide, so everyone gets the same 12:1 rate regardless of rank or age.
It helps to think of the factor as a price. A factor of 12 means each pound of annual pension is "priced" at twelve pounds of cash. The higher the factor, the more cash you get for the same amount of pension surrendered, so the better the deal looks for the member. One thing to hold on to from the start is that commutation is permanent: once you have swapped pension for cash at retirement, you cannot reverse it later, so the factor and the income you give up deserve careful thought rather than a snap decision on your last week in service.
How commutation works on AFPS 15
AFPS 15 is the scheme every serving member has been building since 1 April 2022, and the only one of the three where the commutation factor does the heavy lifting day to day. AFPS 15 pays no automatic lump sum at all. If you want tax-free cash when your pension starts, you have to create it yourself by commuting, and the 12:1 factor is how that cash is calculated.
There is a ceiling on how much you can give up. HMRC rules cap the lump sum at 25% of the capitalised value of your pension benefits, which on AFPS 15 works out as commuting up to roughly a quarter of your annual pension. You cannot turn the whole pension into cash; the scheme is designed to keep most of it paying out as income for life. So the practical levers are simple: choose a percentage to commute, up to the maximum, and the scheme multiplies the pension you surrender by 12 to give your lump sum.
The order of events matters. The scheme first works out your full annual pension, including any revaluation that has built up while the pension was deferred or while you were serving. You then decide what slice of that pension to give up. The amount surrendered is multiplied by 12 to produce the lump sum, and your remaining pension is what is left after the surrender. From that point your reduced pension is the figure that rises each year with the cost of living.
Because the factor is fixed and applies scheme-wide, this is the one commutation case our calculator can model precisely. For the legacy schemes the picture is more complicated, as the next section explains.
Commutation on AFPS 75 and AFPS 05
The two final-salary schemes behave very differently from AFPS 15 because they already build a lump sum into the deal. AFPS 75 and AFPS 05 both pay an automatic tax-free lump sum of three times your annual pension when your pension comes into payment. You do not have to do anything or surrender any income to receive it; it arrives as standard. For most members of these schemes, that automatic lump sum is the cash they will see.
On top of the automatic lump sum, the legacy schemes have historically offered extra one-off commutation options, such as resettlement commutation when you leave, and trivial commutation for very small pensions. These use age-banded factor tables published by the Government Actuary's Department, for example the resettlement commutation factors and the trivial commutation factors. Unlike the flat 12:1 on AFPS 15, these factors change with your exact age in years and months at the relevant date, so there is no single multiplier that covers everyone.
Because those tables depend on member-specific age data, our calculator models the automatic 3x lump sum for AFPS 75 and AFPS 05 but does not attempt the optional resettlement or trivial commutation. Estimating those accurately would need the full GAD age tables and your precise age at the date of the option, so if you are weighing up one of these extra options, that is a moment to get an official forecast rather than rely on any estimate.
So the short version is this. On the legacy schemes the lump sum is largely automatic and set by the 3x multiple, and the GAD commutation factor only comes into play for specific extra options. On AFPS 15 there is no automatic cash, and the 12:1 commutation factor is the whole story for turning pension into a lump sum.
A worked example (illustrative)
Here is an illustrative example using only the AFPS 15 figures above. Treat the pension amount as a round number chosen to show the arithmetic, not as a forecast for any real member. Suppose your AFPS 15 deferred pension works out at £10,000 a year when it comes into payment. You decide to commute the maximum, which on AFPS 15 is up to 25% of the pension.
Step one: work out the pension you are giving up. 25% of £10,000 is £2,500 a year. That is the slice of annual income you are surrendering for the rest of your life. Step two: apply the commutation factor. Multiply the £2,500 surrendered by 12, the fixed AFPS 15 factor, and you get a tax-free lump sum of £30,000. Step three: work out the pension you keep. £10,000 minus the £2,500 you gave up leaves a reduced pension of £7,500 a year.
So in this illustration you receive £30,000 of tax-free cash now and a pension of £7,500 a year instead of £10,000, and from that point the £7,500 is the figure that rises each year with the cost of living. If you commuted less, say 10%, you would surrender £1,000 of pension, take a £12,000 lump sum, and keep a pension of £9,000 a year. The same 12:1 factor drives every version of the sum.
The example shows the trade clearly. You are converting £2,500 of yearly income, payable for the whole of your retirement, into £30,000 today. Whether that is a good swap depends on how long you expect to draw the pension, what you would do with the cash, and your wider finances. The factor tells you the price; it does not tell you whether to buy.
Why the factor matters to your pension
The commutation factor matters because it quietly sets the value of one of the biggest financial decisions you will make on the way out of service. A larger lump sum is tempting, especially if you have plans for the cash, but every pound of lump sum comes at the cost of pension income you would otherwise have received for the rest of your life, and that lost income is index-linked, so it grows over a long retirement.
Whether 12:1 represents good value for you is partly a question of longevity. The longer you live, the more total pension you give up by commuting, because you forgo that reduced income year after year. Roughly speaking, if you draw the pension for many years, the stream of income you surrendered can add up to far more than the lump sum you took. If you do not expect a long retirement, or you have an urgent, valuable use for the cash, commutation can look more attractive.
Tax is part of why people commute. The lump sum is paid tax-free, whereas the pension income it replaces is taxable as earnings once your total income is above your personal allowance. For some members, taking tax-free cash up front and keeping a slightly smaller taxable pension is genuinely efficient; for others, keeping the full guaranteed pension is the stronger move.
There is also a behavioural point worth being honest about. A lump sum is spent or invested by you; a pension is paid to you for life, come what may. Giving up guaranteed, inflation-protected income for a cash sum shifts risk onto your own shoulders. That is not automatically wrong, but it is a real change in the shape of your retirement, and the factor is what makes that trade concrete.
Common misunderstandings
The first and most common mistake is treating the lump sum as free money. It is not. On AFPS 15 every pound of cash you take is a pound of pension you bought at a price of twelve, and that purchase is permanent. People sometimes commute the maximum out of habit, assuming everyone does, without checking whether the income they are giving up matters more to them than the cash.
A second misunderstanding is assuming AFPS 75 and AFPS 05 work the same way as AFPS 15. They do not. The legacy schemes pay an automatic 3x lump sum without any commutation, so a member of those schemes is not necessarily surrendering pension at all to get cash. Mixing up the schemes leads people to expect a swap that does not apply to them, or to miss the automatic cash they are already due.
A third error is thinking the 12:1 factor will change with interest rates or the markets. On AFPS 15 it is a fixed, scheme-wide rate, so the price of commutation does not move with the economy the way an annuity rate would. By contrast, the GAD age-banded factors used for resettlement and trivial commutation on the legacy schemes do vary by your exact age, so it is the opposite mistake to assume those are fixed.
Finally, some members assume they can change their mind later. Commutation is a one-time choice made when your pension starts, and it cannot be undone afterwards. If you are unsure, the safe default is to commute less rather than more, because you can always live more frugally on a larger pension, but you cannot buy back income you have already surrendered.
How to check your own position
Start with the numbers that are actually yours. An estimate from a calculator is useful for understanding the shape of the decision, but the figures that count come from Veterans UK. Serving members can request an official pension forecast using form 12, and preserved members, those who have left but are not yet drawing the pension, use form 14. Those forecasts use your real service record, pay and revaluation, not a simplified model.
Once you have your projected AFPS 15 pension, the maths is straightforward because the factor is fixed. Decide a percentage you might commute, up to the 25% ceiling, multiply that slice of pension by 12 to see the lump sum, and subtract the surrendered amount to see the reduced pension you would live on. Run it at a few different percentages so you can see the trade at, say, 10%, 15% and the full 25%, rather than only the maximum.
If you are an affected member of the McCloud remedy, there is an extra layer to check. For service between 1 April 2015 and 31 March 2022 you choose, via your Remediable Service Statement, whether that period counts towards your legacy scheme or AFPS 15. That choice changes the size of your pension and your automatic lump sum, which in turn changes how much commutation, if any, makes sense. It is worth modelling both options before you fix a commutation decision.
For anything involving the legacy schemes' resettlement or trivial commutation, or any large or irreversible decision, treat the calculator as a sketch and get the official figures. This is an independent education site, not affiliated with the MOD, Veterans UK or JPAC, and it provides estimates rather than regulated financial advice. For a decision of this size, an official forecast and, where appropriate, advice from a regulated financial adviser are well worth the time.
How it relates to other AFPS terms
Commutation sits next to several other terms on this site, and they make more sense together. The lump sum is the cash itself; the commutation factor is the rate that turns surrendered pension into that cash. On AFPS 75 and AFPS 05 the lump sum is automatic at 3x your pension, while on AFPS 15 the lump sum exists only because you choose to commute, which is exactly where the factor comes in.
The factor is one of the actuarial figures set by the Government Actuary's Department, or GAD. GAD publishes both the age-banded commutation factors used on the legacy schemes and the factors behind Early Departure Payments. So when you read about EDP, remember that an EDP lump sum, for example the AFPS 15 EDP lump sum of 2.25 times the preserved pension, is a separate, scheme-defined sum and is not the same thing as the cash you create by commuting your main pension.
Index-linking is the other side of the coin. The pension you keep after commuting is uprated each year, broadly in line with prices, so the income you give up is not static; it would have grown over your retirement. That is why surrendering pension costs more in the long run than the headline numbers suggest. Commutation also connects to your scheme membership and your remediable service, because which scheme your benefits sit in, and any McCloud choice you make for the 2015 to 2022 period, decides whether commutation even applies and how much pension you have to commute from. Read the commutation factor alongside those entries and you will have the full picture of how your tax-free cash is built.