Taxing Military Pensions

Brandnewstart79

Morning,

I have 2 years left to serve in the Military and I've just done my Forces pension calculator.

I stand to get £9931 a year immediate pension so how much would i get taxed on this? I have been told that it will be 30%? I was under the impression that if it was under £10000 its non taxable?

Obviously I will get another job when i leave so that income will be taxable.

Regards

Silvertabby

Your Armed Forces pension will be classed as taxable income (unless it's a War Pension) , but how much you actually pay will depend on your salary.

Your personal allowance (how much you can receive from your pension AND your salary) before paying tax) is £11500.

When I retired from the RAF I applied my personal tax code to my new salary, and paid Basic Rate (20%) on all of my Service pension. However, my pension and salary combined didn't take me into the 40% tax bracket - will yours?

Dazed_and_confused

Military pensions can be completely tax free but this only applies usually to injured or (highly?) honoured service people I believe.

Otherwise the income will all be taxable. In a tax year you had no other income then no tax would be due as it's less than the Personal allowance.

If you have other income/wages then often 20% (basic rate) tax would have to be paid and if you are earning a lot then 40% could be due.

30% tax rate doesn't exist but if you needed to pay some 20% tax and some 40% tax on the pension then you could have an effective tax rate of 30% but the military would only ever deduct 20% (tax code BR) or 40% (code D0) during the year, any shortfall or overpayment would be sorted after the end of the tax year.

Brandnewstart79

Hi and thanks for your replies.

I will be working but will try and stay under the 40K to avoid the 40% tax bracket tbh.

I'm thinking of commuting some of my pension to get a bigger tax free lump for the purpose of putting it into a mortgage.

So if i ended up working and taking home 35K a year, £9900 pension and the rest wages for my new job i would just get taxed on earnings over £11500??

Dazed_and_confused

Yes, normally you would have first £11500 wages with no tax and then 20% on anything over that and the pension would be 20% on it all so £825/month gross would become £660 take home for the pension. No national insurance to pay on the pension either.

Brandnewstart79

Thanks for the info.

Going to commute the lump sum and get more as it's non taxable then. Makes sense to do that.

Dazed_and_confused

That's very much a matter of opinion!

From posts on the pensions board it seems a factor of 12 is a common commutation factor so if you swapped say £2000 for a lump sum you would get an extra £24000 now but you would be losing £1600 (net of tax) every year for the rest of your life.

Let's say you're 50 now and live to 90 that's £1600 x 40 so you"re effectively giving up £64,000 over the long term in return for £24,000 now.

Will be right for some but not for all.

Obviously commutation rate, age now, expected life expectancy and need for the cash now all make a difference.

Brandnewstart79

Think it could be time for some financial advice on the best options.

agrinnall

Brandnewstart79 wrote: »

I will be working but will try and stay under the 40K to avoid the 40% tax bracket tbh.

You do know that you only pay 40% on the amount over the threshold (which is approximately £45K) don't you?

Silvertabby

Going to commute the lump sum and get more as it's non taxable then. Makes sense to do that.

How old are you, and are you leaving under AFPS75, AFPS05 or AFPS15?

Mr S and I retired under AFPS75 and so commutation was a no-brainer. We took the higher tax free lump sums in return for the lower pensions, which then flat-lined until we were 55. At that point our pensions were restored to their full pre-commutation values and index linked back to the day we left (we were both in our 40s when we retired on our immediate pensions).

Not so clear cut for AFPS05 and AFPS15.

Brandnewstart79

Hi I will be 39 when I leave and I'm on the AFPS75 with 4 years of the 05 pension.