Commutation of Army Pension - Is it worth it?
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Hi Sam good name that lol.:D
I left the royal artillery after taking voluntary redundancy due to becoming a diabetic i got absoloutly no advice or help from the army in my transition to civvy street. I was told by a freind though that if i didnt commute my pension that i will be taxed on my army pension so it is better to get a lump sum from them and invest it or as in my case use it for a deposit on a house as the council decided that i wasnt eligible to get a council house as i wasnt a local here in thirsk although i had been living in the local married accomadation on the barracks here for nearly 13 years and paying council tax.Maybe i was nieve but i didnt even claim for a war pension untill i had been working doing loads of overtime just to pay the bills for 7 years now i have a good war pension and everything is ok but i wish i had had some advice from my peers and superiors before i left. It was thanks and cheerio from them.
all the best my freind i hope your transition to becoming a civvi is a good one. Sam:j0 -
I left with the last redundancies, RAF, and took full commutation as i was using it to purchase a house (btl). Remember you have up to 1 year from discharge to do this. It really is a personal thing and down to what you want/need the money for. You will pay roughly twice back what you borrowed but no tax on your repayments or your lump sum.
Grey,
What did you mean by paying roughly twice back what you borrow? I was speaking to a few ex-forces civvies at work today and they din't know eiter?John :beer:
Life's too short.........0 -
You "pay it back" by having the pension reduced. So work out how much you get by commutation and then multiply the pension reduction by the amount of years to age 55.Grey,
What did you mean by paying roughly twice back what you borrow? I was speaking to a few ex-forces civvies at work today and they din't know eiter?
In my case I received 9K tax free. My pension was reduced by £102 gross per month which means by age 55 I will have "paid back" 18.5K (after tax would be around 14.8K). The 9K was invested which even at 4% net pa = over 16K at age 55.0 -
You "pay it back" by having the pension reduced. So work out how much you get by commutation and then multiply the pension reduction by the amount of years to age 55.
In my case I received 9K tax free. My pension was reduced by £102 gross per month which means by age 55 I will have "paid back" 18.5K (after tax would be around 14.8K). The 9K was invested which even at 4% net pa = over 16K at age 55.
Cheers for that - Makes sense to me now.John :beer:
Life's too short.........0 -
I left the RN in 96 and commuted the max for 15 years.
The received wisdom then was to take the money and nearly everyone did, except perhaps those with exceptional circumstances whereby the received the pension tax free. These were normally medical or hurt cert discharges.
One thing to be aware of though regardless of which option you chose is that if your salary from your new occupation and your pension added together break the 40% tax threshold you will have to pay 40% tax on that portion (about 39K this year I think)
So if you earn 30K and your pension is 12K you will pay 40% tax on income above 39K.
I suppose this points toward commutation if you feel you will be earning a decent salary when you get settled in civvy street.
The taxman has given me a severe spanking lately over this so I am talking from experience.0 -
Soldier Sam,
I left the RN in April with 24 years pension, I commutated the maximum (£16,421 for 13 years pension). I made a 'simple' excel spreadsheet to help me decide what to do, and made the choice from there (following is using your figures):
1) Fully commute and receive extra £16,761 (tax free) for the loss of £170 (taxed to £136) per month. With Tax free savings (i.e. cash Isa) you can put £7.2k away this year for you and another £7.2k for BH (if applicable), that's £14.4k earning tax free interest, with average cash Isa exceeding 6%.
If you invest the whole amount earning 5% net (for example) for 15 years you should get just under £35K; assumes interest calculated annually.
2) Don't commutate and get an extra £170 a month taxed (£136 net). Invest that amount month after month, year after year at 5% net and you won't get as much!
As already stated by MTW you could end up paying 40% tax and not 20% on that £170.
This also counts as income against Child Tax Credit, etc.
Or
3) Tesco are doing 2 cases of Stella for £16, that's 2094 cases @ 20 x 284ml bottles per case! Party time!:T0 -
Sorry,
Forgot to add.
What is easier to spend without realising it:
1) £136 a month
or
2) £16,761?
Please note: 2094 cases are difficult to store!:beer:0 -
My decision was based on the Salary of the job I was walking into.
It is a big step finding out you no longer have dental, medical care, illness cover etc etc. there is so much to consider.
I worked out the minimum wage I could accept to maintain my standard of living (including pension if I fully commuted).
I was offered more than that minimum so I fully commuted.
In hindsight, I do think it was the better option for me, but if I hadn't been offered a well paying job when I left, I would rather have had the larger income each month from my Pension.
It really is a personal decision, you will have to live with it for a long time to come.
An additional commutated lump sum which you may waste on the new car/ Disneyworld Holiday etc. you have been promising yourself will be short lived.
If your new job doesn't pay you well, you will definitely regret commuting.0 -
Does resettlement commutation offer positive financial benefits if the receiver dies before age 55?
Does the surviving spouse then receive their 50% and 25% per school aged child without commutation deductions continuing until the entitled holders 55th birthdate?
or do they still have the deduction taken from their pension?0
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