Commuting a work disability pension: what is possible today and what is not
Full commutation of the pension was abolished on 2 October 2011. What remains is partial commutation of up to 25% of the pension, or periodic commutation of up to five years, and in both cases the money is an advance on future payments rather than an addition.
What commutation is
A person for whom a degree of work disability of 20% or more has been determined receives a monthly pension. Commutation is the conversion of that pension, in whole or in part, into a one-time grant.
The National Insurance Institute defines it as a grant converting the monthly pension, in whole or in part, into a single lump sum. In practice the amount reflects the value of future pension payments, calculated by an actuarial formula.
The implication is plain: this is money brought forward that would otherwise have been received later, not an addition. That is the starting point for any assessment of whether it is worthwhile.
Source: National Insurance Institute, commutation circular.
Two kinds of commutation, and what is no longer possible
This is the point most often misunderstood. Full commutation of the pension is no longer possible - according to the Institute circular, that option was abolished as of 2 October 2011.
What exists today are two routes:
- Partial commutation - up to 25% of the pension amount.
- Periodic commutation - for a period of up to 5 years.
Anyone approaching the subject on the assumption that the whole pension can be converted into one large sum is working from a reality that changed more than a decade ago.
Source: National Insurance Institute, commutation circular.
Conditions of eligibility
The circular lists several conditions examined together:
- A degree of disability of at least 20%, determined as permanent.
- Steady income sufficient for subsistence - either actual or reasonably anticipated.
- A rehabilitation purpose that the applicant presents for the use of the money.
- No medical re-examination is scheduled, under regulation 37.
Alongside these, the Institute notes a further condition in its commutation calculator: that at least 5 years remain until retirement age, and that the applicant is a resident of Israel whose centre of life is in Israel.
The two conditions that most often defeat applications are the steady income and the rehabilitation purpose, because both call for an orderly presentation and not merely a declaration.
Source: National Insurance Institute, commutation circular; commutation calculator.
What happens at the end of the period
In periodic commutation the pension does not disappear. According to the circular, at the end of the requested period the pension is renewed in full.
In addition, once the commutation period has ended a further request for periodic commutation may be submitted.
The practical meaning is that the decision is not necessarily final for life, but it is final for the period chosen. During those years no pension will be received, even if circumstances change.
Source: National Insurance Institute, commutation circular.
What goes into the assessment
The decision is not purely legal. These are the questions that recur:
- What is the purpose - the circular requires a rehabilitation purpose, so presenting it forms part of the application and is not merely an internal consideration.
- What is the income position - both as a condition of eligibility and as a practical question: what happens during the commutation years without the pension.
- Is the medical position stable - the condition that no re-examination is scheduled indicates that the route is intended for those whose condition has settled.
- What are the alternatives - whether the need the money is intended for actually requires commutation.
This page presents the framework the National Insurance Institute publishes. It is not a substitute for financial advice, and the financial aspect is worth examining with a professional in that field.
In summary
Commutation converts a work disability pension, in whole or in part, into a one-time grant. Full commutation was abolished on 2 October 2011, and what exists today is partial commutation of up to 25% of the pension, or periodic commutation of up to 5 years. The conditions include a degree of disability of at least 20% determined as permanent, steady income sufficient for subsistence, a rehabilitation purpose, no scheduled medical re-examination, and at least 5 years remaining until retirement age. At the end of the period the pension is renewed in full, and a further request may be submitted.
The point easily missed is that commutation is not an addition but an advance. The money received is the value of future pension payments, so the question is not how much is received now but what happens in the years during which no pension will be received.
If you are considering commutation or your application was refused, contact us with the disability determination and the details of the application. We will review the conditions and the next step.
The questions that come up most
Can the whole pension be commuted at once?
What is the minimum degree of disability for commutation?
What happens to the pension at the end of the commutation period?
Is there an age condition?
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Send us the disability determination and the details of the application. We will review the conditions and the next step.