Commutation of Army Pension - Is it worth it?



  • webby962webby962 Forumite
    11 Posts
    Greetings all,

    Firstly thanks for all the advice on this thread. Hopefully my questions will be treated as well as the other posters :)

    I am almost ready to leave the forces (Jan 2011) after 22 years colour service and will be 40 when posted to civ div!
    I am very naive when it comes to tax, and other things that I probably should know about, but 22 years of being looked after made me lazy!

    I have a few options, and at first I considered a full commute of the pension.

    This would give me circa 60k lump sum, and an annual pension from 40-55 of circa 10k

    Now the bit I need to understand. If I get a job worth 45k how am i taxed?
    I used the tax calculator from the Internet and in-putted my details.
    Do I add the 10k pension to the 45k wage and use that as my annual earnings?

    Also how am i taxed generally? I believe my first 6.4k is tax free, that leaves 38.6k on my wages. 37.4k is taxed at 20% and the remaining 1.6k is taxed at 40%?

    Therefore am I right to assume that my pension is counted as part of my wage, therefore the numbers are:
    Wage + Pension circa 55k
    Free amount 6.4k
    20% amount 37.4k
    40% amount 11.6k

    Sorry if this seems basic to some people, but as I said before, this is all new to me :)

  • When I used to deal with those leaving the forces, most would ask which was best...commute as much as possible, or take the bigger pension. If it were me, I'd commute, as the lump sum is tax free and your pension won't be.
    When I had two jobs, I registered the highest paid one with HMRC as my main job, so that I would receive my tax free allowance on that one, and only the smaller job income would be fully taxed at basic rate.
    I may be wrong with the bands, but for the 09/10 year you will get the first £6475 of your income tax free, pay 20% on any more income up to £37400, then 40% on anything over that.
    A lot of people seem to interpret it as paying 40% on everything when they hit that tax band, but that's not the case.
    I'm confusing myself now! LOL
    From Starrystarrynight to Starrystarrynight1 and now I'm back...don't have a clue how!
  • CHR15CHR15 Forumite
    5.2K Posts
    Part of the Furniture 1,000 Posts Combo Breaker
    Remember you will be dealing with two separate Tax Offices. One for the forces Pension, and one for your salary.... Oh! the Joy!!

    Agree with above, tax free allowances all from your main job.
  • edited 10 March 2010 at 5:29PM
    joe_public_2joe_public_2 Forumite
    8 Posts
    edited 10 March 2010 at 5:29PM
    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?? :confused:

    This is a reply which I wrote to a similar question (on another forum) back in the middle of last year. The info should still be valid although the interest rates have obviously changed since then:

    "We'll use my scenario as a WO1 for example; taking the actual figures from the pension calculator.

    If I take the regular pension I get:

    Lump Sum: £40,485 tax free
    Pension: £13,495 taxable

    If I commute I get:

    Lump Sum: £60,900 tax free
    Pension: £10,991 taxable

    So if we do the maths, on paper at least I can take an extra £20,415 (tax free) but I will lose £2,504 (taxable) for the next 15 yrs (until I am aged 55).

    The smart ones amongst you will have worked out that 15 x £2,504 = £37,560.

    It doesn't look so good does it - in effect for the extra £20,415 (tax free) which I am 'borrowing', it looks like I end up paying back £37,560 (taxable).

    But this isn't the end of the story because this is where the tax bit kicks in......

    Now I am going to make a presumption here which I think applies to all of us. We're all going to get another job and we're all going to earn more than our tax allowance (£6,475 for 2009/10). This means that we're going to pay tax on all of our monthly pension at a rate of at least 20%.

    So what does this mean I hear you ask?

    What it means is I don't actually 'lose' £37,560 out of my pocket because I never actually received that much in the first place - the tax man had already taken 20% of it before it went into my bank. What I actually lost in 'real' money was £30,048.

    Now the sums are looking a little better; for the extra £20,415 (tax free) which I am 'borrowing', I end up paying back £30,048 (after tax).

    Hmmm, but this still means that I pay back an extra £9,633 though over the 15 yrs, not exactly great you might think.

    However, we now move on to what do I do with the extra £20,415. Having done a quick search of savings on moneysupermarket I can get a fixed bond which pays 3.24% (after tax). So if I tuck my £20,415 away for 15 yrs it will have grown into a tidy £32,936 (after tax). This means that I have earned £12,521 in interest.

    Well here we are, we've come full circle..........

    You can commute your pension and have the security of knowing that the money is in your bank should you need it, or should anything happen to you - no one can take it away once it's in your mitts and you never know how long you're going to live. Provided that you invest it wisely it won't cost you a penny, in fact, as you can see from my example you could actually make a profit (£2,888).

    On a final note, let's not forget that once we reach 55 the pension will revert back to it's full value (including RPI increases) anyway. So we're now back on the same level playing field as the 'non commuters.'

    These things are never as simple as they seem are they..........."
  • I've just read all the above with great interest! Would any of you be kind enough to give me some information regarding a Naval pension and divorce? I have just seperated from my RN husband and we are currently trying to sort out an amicable settlement. Let me emphasise that I am not trying to 'go after' my husband's RN pension - we've been married for 10 years and before and during that time i have always worked so I could contribute financially (even during two babies) - I am just trying to understand what's going to be in the pot. My husband is away and won't be back for a few weeks so I won't be consulting him or a solicitor til then.

    I think I'm right in saying I wouldnt be paid any money from the pension til my own state retirement age (currently 68!)? If so, would this just be a proportion of whatever my pension my husband was receiving at that same time or would it include any sum commuted earlier? What if my (divorced) husband were to die before I reached 68-would the pension just disappear? Obviously this would make a difference to the agreeement we reach.

    We know we can pay for a pension statement from the Navy, but as I say we won't be able to sit down together for a bit and I'm trying to get a heads up meanwhile. It's disquieting to realise how much you don't know about Stuff until something like this happens.

    Any info or advice (for either of us) much appreciated..........
  • adwilliamsadwilliams Forumite
    12 Posts
    I seem to recall that they use a formula based on length of service and length of marriage.

    So for instance if he did 22 years (like the Army) and you were married to him for 10 of them, 10/22 in is the pot to be divided equally between you and 12/22 is his alone. Like wise with the lump sum. I seem to recall that's what they did with one of my mates when he left and looking at it it does seem fair and seem to make sense, but that was back in 1998. In his case, he offered her more of his lump sum in return for her leaving the pension alone and she accepted that.
  • edited 3 May 2010 at 4:11PM
    CHR15CHR15 Forumite
    5.2K Posts
    Part of the Furniture 1,000 Posts Combo Breaker
    edited 3 May 2010 at 4:11PM
    ? I have just seperated from my RN husband and we are currently trying to sort out an amicable settlement..

    You are correct in saying you wouldn't receive any of his pension until your own pensionable age.

    Putting all this aside though. Do everything you can to make a clean break.

    If he loses a portion of his pension, he will be embittered toward you forever more (he will lose the slice immediately, although you wouldn't benefit for years to come)

    Try to agree on the clean break and go your separate ways without stinging his future income. Anything else, and the amicable part will be destroyed.

    If he is like most blokes, he would rather have the good kicking in one go (give up the house/contents etc) and have no further penalties to pay.

    All this pension splitting simply leads to arguments and bitterness for years and years.

    Children are a different subject, it is taken as given he will contribute in accordance with the regulations.

    EDIT: didn't realise this was a question from the middle of March!
  • joe_public wrote: »
    I am not an expert but I doubt you would receive a lump sum at age 55 because that applies to 'preserved pensions' which are paid at age 60.

    Preserved pensions are for servicemen that leave the forces early but I don't think redundancy applies.

    My best guess is that your pension will increase by the RPI rate for the years between leaving the Army and reaching 55.

    Had you left early for a reason other than redundancy you would have received nothing until you were 60. At 60 you would have received your preserved pension of 18/22 of a full pension (including the RPI inflation) based on your £20K final earnings. In this case it would amount to around £5,250 a year (+ RPI Inflation), plus a lump sum of 3 times the annual pension tax free.

    I don't think you'll get the lump sum but using a best guess inflation figure of 3% you might find your yearly pension jumps to around £9,500 when you turn 55.

    I never did say thank you for your reply :( Thanks

    Do you know if i can Defer my pension, i d'ont need it at the age of 55 so would like to keep this fund working for me, even more so that i am in the higher tax bracket.


    £100 to £10k in 2010 using the magic of internet poker (Don't play poker unless you know what you are doing)

    Lowest fig £25.00
    Current Balance £7000 :( Fail
  • joe_public wrote: »
    Just to follow up on my last comment - you need to claim a preserved pension yourself, it won't come through automatically. The form can be found here:

    Sorry for the delay Joe :)

    Is mine classed as a preserved pension then?

    £100 to £10k in 2010 using the magic of internet poker (Don't play poker unless you know what you are doing)

    Lowest fig £25.00
    Current Balance £7000 :( Fail
  • After doing a bit more reading and trying to get a more accurate figure to my likely final pension amount,i have hit a wall can you help. Am i reading it right that if you served a full 37 years ( 18-55) one would recieve 48.5 % of your final salary as a final pensionable amount. As i left at the 18 year point under Voluntary redundacy that i would receive 18/22 of the 37 year full career amount ?

    Have i got that right?

    Thanks in advance, i will check in a little more often :)

    £100 to £10k in 2010 using the magic of internet poker (Don't play poker unless you know what you are doing)

    Lowest fig £25.00
    Current Balance £7000 :( Fail
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