Inverse commutation explained

What inverse commutation actually means

Ordinary commutation only runs one way. You hand back a slice of your yearly pension and, in return, the scheme pays you a tax-free lump sum. On AFPS 15, for example, you can commute up to 25% of your pension at a fixed rate of £12 of lump sum for every £1 of annual pension you give up. It is the classic take some cash now, accept a smaller income trade.

Inverse commutation, sometimes called reverse commutation, does exactly the opposite. You start with a lump sum, give part of it back to the scheme, and in exchange your yearly pension goes up. Nothing else about the pension changes: it is still paid for the rest of your life and still rises with inflation each year.

The reason the option exists is that some members are handed a tax-free lump sum automatically whether they want it or not. If you would rather have more guaranteed monthly income than a pot of cash, inverse commutation is the mechanism that lets you convert one into the other.

Who can use it

Inverse commutation only makes sense if you have a lump sum to give up in the first place, and that points squarely at the two older schemes. AFPS 75 and AFPS 05 both pay an automatic tax-free lump sum of three times your annual pension when you come to draw it, and it is that automatic cash that inverse commutation lets you trade back for extra income.

AFPS 15 is different. It pays no automatic lump sum at all, so there is nothing to reverse. If you are in AFPS 15 and you want a bigger pension rather than cash, you do not inverse commute; you simply commute less, or nothing, in the first place. The table below shows where the option realistically applies.

The trade-off: less cash now, more income for life

The heart of the decision is easy to state and harder to judge. You are giving up a fixed amount of tax-free cash today in return for a higher pension paid every year for the rest of your life. Because armed forces pensions in payment are index-linked, that extra income is not static: it rises with inflation, by 3.8% from April 2026, so its buying power is protected as the years go by.

Whether that is a good deal turns largely on how long you live and how much you value certainty. Buy extra pension and you are, in effect, backing a long retirement, because the longer you draw it the more the uplift pays back. Take the cash instead and you keep full control of it, can invest or spend it as you choose, and leave the rest in your estate. Neither is automatically right; it depends on your health, your other savings, and how much you need to get your hands on now.

How the exchange rate is set

This is where inverse commutation gets fiddly, and where the fixed 12:1 rate that governs AFPS 15 commutation does not help you. The rate at which lump sum converts into extra pension is set by the Government Actuary's Department using age-banded commutation factors, the same family of tables that governs resettlement and trivial commutation in the legacy schemes.

Those factors depend on your exact age in years and months at the relevant date, which is why there is no single multiplier anyone can quote you up front. A figure that is right for someone leaving at 55 will be wrong for someone leaving at 60. For that reason this site does not model an inverse commutation rate: the only reliable number is the one Veterans UK calculates against your own record, and you should treat any rule-of-thumb figure with caution.

The tax angle

The tax treatment is a big part of why anyone thinks twice. The lump sum you would be giving up is tax-free, whereas the extra pension you buy with it is taxable as income in the normal way, along with the rest of your pension and any other earnings. So you are converting a tax-free asset into a taxable one, and the higher income could, in some cases, nudge more of your pension into a higher tax band.

That does not make inverse commutation a bad idea, but it does mean the headline swap is not the whole story. The real comparison is tax-free cash now against taxable income later, and the answer depends on your total income in retirement. It is exactly the kind of calculation worth running past someone who can see your full tax position.

When it can make sense

Inverse commutation tends to appeal to people who simply do not need a large lump sum. If you have no debts to clear, no purchase in mind, and enough cash elsewhere, a guaranteed inflation-proofed income can be worth more to you than a one-off payment sitting in a savings account. It removes a decision, too: you cannot outlive a pension the way you can run down a lump sum.

It also tends to suit those in good health who expect a long retirement, because the extra pension only pays back over time. Against that, if your health is poor, if you have dependants who would benefit more from the cash, or if you have a concrete use for the money, keeping the automatic lump sum usually wins. The one thing to avoid is treating it as a default in either direction.

How to get your real figures

Because inverse commutation is irreversible once you have drawn your pension, it is worth getting right rather than fast. Start by requesting an official forecast from Veterans UK, which will show your automatic lump sum and your pension figures calculated against your actual service record, something a general calculator cannot fully reproduce.

This site is independent and is not affiliated with the MOD, Veterans UK or JPAC, and the figures here are estimates rather than regulated financial advice. Use our guides to understand how the pieces fit together and what questions to ask, then, given the tax angle and the fact that the decision cannot be undone, take regulated financial advice before you commit. For a choice of this size, an adviser who knows the armed forces schemes is money well spent.