Commutation of Army Pension - Is it worth it?
in UK armed forces MoneySaving
93 replies 111.1K views
I retire from the Army next month after 22 years service and will receive a full pension. I will also have a commutation option of an additional (tax free) £16,761, but if I accept it, my monthly pension drops by £170 per month! I return to my full pension on reaching the age of 55. My question is, should I take the extra money and pay it off some of my mortgage or take the full pension (all of which will be taxed) then increase my monthly mortgage payments? I worked it out that for the £16,761 they are offering, they actually take over £30,000 from me over the 15 year period! Which option would be best??
This discussion has been closed.
Latest MSE News and Guides
Martin and MSE campaign win
April's 20% energy price guarantee hike postponedMSE News
Childcare budget boost
More support for children from nine months and those on Universal CreditMSE News
Energy Price Guarantee calculator
How much you'll likely pay from AprilMSE Tools
The prevailing wisdom was that if your pension plus new salary put you well into the higher tax bracket, or the mortgage rate rose above 6% the ‘safe way’ was to take a lump sum and pay off your mortgage.
For a standard rate tax payer and mortgage rate below 6% it was less clear cut, and depended on what return you assumed was possible when investing that element of the pension(£170 monthly for the OP)
The other option considered was to invest the £170 in a second pension.
I don’t think there is a single Serviceman who hasn’t faced this dilemma as they approach the end of their pensionable service. It was an even worse dilemma for officers who had the option to commute part of their pension for life!
In your position I suspect that there will not be a huge difference whichever path you choose at the end of 15 years; although new rules on investing in another pension may make this a more attractive option.
However there are some real experts on here who hopefully will give you the benefit of their wisdom.
This sounds like "Life Commutation".
The OP is referring to Resettlement Commutation, to quote from the MoD website:-
"If you leave the Armed Forces before reaching the age of 55 ..................... you may apply for resettlement commutation. There will be a compensating reduction in your pension, which will be restored to its original value at the age of 55."
The differences between the two types of Commutation were always very well explained - hence the poor take up of Life Commutation. Life is being/has been phased out.
I'm in RAF and having served 8 years so far, I cannot pretend to be a pensions expert.
Many people I have spoke to, who are nearing the end of their sefvice are commuting the maximum. The rationale behind this is that you do not pay any form of tax on this lump sum when you take it out. If you receive this as a monthly contribution you will pay either 20% or 40% dependent upon your circumstances.
Of course if you did take it all out you would have to be careful not to spend it all!!!
Life's too short.........
Shows how much of an expert I am, I didn't even realist that you payed the lump sum back?
Also Sam, you may wish to post a similar thread in the pensions board. All the financil experts hang out there (inc. some financial advisers). You may get an additional, informitive response from there.
Life's too short.........