Final salary: lump or income

Take the bigger lump sum, or keep the pension?

The commutation factor your scheme is offering against what the income would cost to buy, and the age at which keeping the pension wins.

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What you enter: age when it starts · pension given up, a year · extra lump sum offered · your tax rate in retirement % · the pension would rise.

Worked example

Take the bigger lump sum, or keep the pension — an example

Inputs

Age when it starts: 65
Pension given up, a year: £3,000
Extra lump sum offered: £45,000
Your tax rate in retirement %: 20%
The pension would rise: With inflation (typical)

Result

The factor offered (lump ÷ pension): 15.0
After tax at 20% (lump is tax-free): 18.8
Buying that income back would cost about (factor): 23.8
Keeping the pension pays more if you live past about: 84

An insurer would charge about £24 per £1 of inflation-linked income at 65 — so a factor of 15 is less than the income is worth on the open market. Scheme factors of 12–20 are common. Health, the survivor's share and simply wanting the cash all matter too. Information, not advice.

How it is worked out. The commutation factor is the lump offered per £1 of yearly pension given up. Because the pension is taxed and the lump is not, the after-tax factor is lump ÷ (pension × (1 − tax rate)). It is compared with the price of the same income from the dated annuity table, and the breakeven age is the start age plus the after-tax factor in years (growth on the invested lump and indexation roughly offset, so this is indicative).

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Not advice. Money Horizon is a planning indicator built on simplified rules. It does not know your full circumstances, cannot replace a regulated adviser, and its figures should not be relied on for any decision. It is not financial advice. Nothing you enter leaves your browser. Calculators use the 2026-27 rules; figures are estimates.