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  • FIRST POST
    soldier sam
    Commutation of Army Pension - Is it worth it?
    • #1
    • 11th Jan 07, 5:30 PM
    Commutation of Army Pension - Is it worth it? 11th Jan 07 at 5:30 PM
    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:
Page 1
    • Cardew
    • By Cardew 11th Jan 07, 7:19 PM
    • 27,423 Posts
    • 13,434 Thanks
    Cardew
    • #2
    • 11th Jan 07, 7:19 PM
    • #2
    • 11th Jan 07, 7:19 PM
    To enable the financial gurus amongst us to formulate advice it is pertinent to point out that soldiers can retire at 40(or with 22 years service) with an immediate pension. That pension is fixed until they reach age 55 when it is enhanced by inflation over the preceding 15 years. From that age it is inflation linked in the same manner as most government pensions.

    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 !!!8216;safe way!!!8217; 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(!!!163;170 monthly for the OP)

    The other option considered was to invest the !!!163;170 in a second pension.
  • soldier sam
    • #3
    • 11th Jan 07, 7:45 PM
    • #3
    • 11th Jan 07, 7:45 PM
    Thanks for the input, you have explained it a little better! The reason I have asked this question is, with the new increase in interest rates today I feel that it may be worth taking the money and running but who knows whats around the corner... having a nice larger sum every month is certainly appealing!
    • Cardew
    • By Cardew 11th Jan 07, 9:51 PM
    • 27,423 Posts
    • 13,434 Thanks
    Cardew
    • #4
    • 11th Jan 07, 9:51 PM
    • #4
    • 11th Jan 07, 9:51 PM
    Thanks for the input, you have explained it a little better! The reason I have asked this question is, with the new increase in interest rates today I feel that it may be worth taking the money and running but who knows whats around the corner... having a nice larger sum every month is certainly appealing!
    by soldier sam
    I donít think there is a single Serviceman who hasnít 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.
  • soldier sam
    • #5
    • 11th Jan 07, 10:16 PM
    • #5
    • 11th Jan 07, 10:16 PM
    Hopefully someone on the forum will offer advice over the next few days, if not, then I will call an independant financial adviser to see what they say...

    Thanks
  • JACKLX
    • #6
    • 26th Apr 08, 9:52 AM
    Commutation of MOD Pension
    • #6
    • 26th Apr 08, 9:52 AM
    I went in for commutation when I qualified for pension after 22yrs in 1977. I consider I was swindled. I was told I would have £75.00 deducted from my annual pension to pay for a commutation sum of £1000.00. This seemed quite fair as interest rates were high at this time. I assumed that when I reached age 55 and the pension would be increased I would continue to be £75.00 per annum worse off than someone who had not commuted. This was not the case, the £75.00 contribution was effectively increased by the same as my pension resulting in losing £220.00 per annum, a figure which is effectively increased by RPI each year. This was not made clear at the time I decided to commute, I would suggest that anyone considering commutation should confirm how much the deduction will be when reaching 55.
  • moonrakerz
    • #7
    • 26th Apr 08, 4:07 PM
    • #7
    • 26th Apr 08, 4:07 PM
    I went in for commutation when I qualified for pension after 22yrs in 1977. I consider I was swindled. I was told I would have £75.00 deducted from my annual pension to pay for a commutation sum of £1000.00. This seemed quite fair as interest rates were high at this time. I assumed that when I reached age 55 and the pension would be increased I would continue to be £75.00 per annum worse off than someone who had not commuted. This was not the case, the £75.00 contribution was effectively increased by the same as my pension resulting in losing £220.00 per annum, a figure which is effectively increased by RPI each year. This was not made clear at the time I decided to commute, I would suggest that anyone considering commutation should confirm how much the deduction will be when reaching 55.
    Originally posted by JACKLX
    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.
  • archived user
    • #8
    • 26th Apr 08, 5:00 PM
    • #8
    • 26th Apr 08, 5:00 PM
    I took full commutation when I left in 2005 (30yrs RAF). I worked it out that I would be better off by putting that money in a high interest account in one lump sum.
  • johng_uk
    • #9
    • 18th Jun 08, 9:28 PM
    • #9
    • 18th Jun 08, 9:28 PM
    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:
    Originally posted by soldier sam
    Sam,

    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!!!
    John

    Life's too short.........
  • greytroot
    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.
    You cant take the trousers off an elephant!
  • johng_uk
    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.
    Originally posted by greytroot
    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.
    John

    Life's too short.........
  • samtheham
    commuting
    Hi Sam good name that lol.


    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
  • johng_uk
    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.
    Originally posted by greytroot

    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

    Life's too short.........
    • molerat
    • By molerat 19th Jun 08, 4:49 PM
    • 19,097 Posts
    • 13,320 Thanks
    molerat
    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?
    Originally posted by johng_uk
    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 !!!163;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!!!37; net pa = over 16K at age 55.
    Last edited by molerat; 19-06-2008 at 5:05 PM.
  • johng_uk
    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.
    Originally posted by molerat
    Cheers for that - Makes sense to me now.
    John

    Life's too short.........
    • MTW
    • By MTW 20th Jun 08, 12:29 AM
    • 491 Posts
    • 144 Thanks
    MTW
    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.
    • ghandi
    • By ghandi 23rd Jun 08, 6:59 PM
    • 134 Posts
    • 709 Thanks
    ghandi
    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!
    • ghandi
    • By ghandi 23rd Jun 08, 7:09 PM
    • 134 Posts
    • 709 Thanks
    ghandi
    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!
  • johng_uk
    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!
    Originally posted by ghandi
    Good point, well presented!!
    John

    Life's too short.........
    • CHR15
    • By CHR15 24th Jun 08, 12:35 PM
    • 4,835 Posts
    • 4,169 Thanks
    CHR15
    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.
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