Commutation of Army Pension - Is it worth it?

Sparky29 · 26 June 2008 at 12:47AM

Renovatio wrote: »

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?

I was told that you are always better off commuting because of the tax implications already mentioned, ie the lumpsum is tax free and can start earning money, the pension is taxed.

Also, everybody posting is assuming they are going to live to live to 55 and beyond. Statistically speaking as a squaddie you probably will die a lot younger than the national average, hence the new (money saving) Forces 05 pension the Government have introduced.. If you have dependants or NOK they are financially better off having the money up front. Don't know the maths behind it but was told you could drop dead the day after discharge and your part of the pension goes with it. An extra £16k off the mortgage for a widow would be a big help.

Sorry to be a bit morbid but that was the way it was told to me. I may be wrong. I'm sure somebody who is better informed could comment.

pomp · 15 August 2008 at 11:20PM

As you rightly said the pension is taxed, but the commution is not.

However the government have realised that us forces guys are able to get our hands on a large amount of untaxed money, if we commute, and they are trying to close this loophole so that the commuted money will also be taxed.

I have seen this published on our Stations Intranet but would have to do a bit of digging to find it again, so my advice is take the lot!, i know im going to next year when i get to my 22, if i can

Yes, you do actually work out being slightly better off if you dont commute any but just take the pension, but as people have said, anything can happen between now and 55.....

norriesmall1 · 28 October 2008 at 5:35PM

Hi all,

if you go here you will find out exactly what the commutation is for Army. This also may be useful for the Navy or Air Force personnel as well.

http://www.army.mod.uk/documents/general/commutation_of_pensions.pdf

norriesmall1 · 28 October 2008 at 5:37PM

I would like to know if you also get 3 times the pensions at age 55 as a tax free package. it does not tell you on that website i just posted

Steveswift · 28 October 2008 at 10:19PM

Hi all,

Can you help?

I left the Army in 1996 on Vol Redundancy with a 60k lump sum, i comm the max.

I was a wo2 with 18 years service, i also currently recieve a £3000 pension.

How can i work out what i might recieve in the future. I think my salary at leaving was approx 20K.

I was also sure that i reveived a full pension at aged 55 ( i am 50 in may)

Can any one give me ball park figures? Do i recieve a lump sum also?

Sorry to be so dull but i dont understand pension

but now feel i need to get a grip.

Regards

Steve

joe_public_2 · 5 December 2008 at 3:51PM

Steveswift wrote: »

Hi all,

Can you help?

I left the Army in 1996 on Vol Redundancy with a 60k lump sum, i comm the max.

I was a wo2 with 18 years service, i also currently recieve a £3000 pension.

How can i work out what i might recieve in the future. I think my salary at leaving was approx 20K.

I was also sure that i reveived a full pension at aged 55 ( i am 50 in may)

Can any one give me ball park figures? Do i recieve a lump sum also?

Sorry to be so dull but i dont understand pension but now feel i need to get a grip.

Regards

Steve

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.

joe_public_2 · 5 December 2008 at 3:56PM

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.

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:

http://www.mod.uk/DefenceInternet/AboutDefence/WhatWeDo/Personnel/Pensions/ArmedForcesPensions/TriSchemeBooklets/AfpsForm8.htm

tartanterra · 5 December 2008 at 10:03PM

soldier_sam wrote: »

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??

One of the biggest problems with making this type of decision is that it is impossible to predict what will happen in the future.
For example, if within a few years years of leaving, the rate of inflation went through the roof, the value of your pension payment would quickly erode, but if you had commuted and invested the cash, then at least the cash you had in the bank would be benefitting from probable high interest rates.
Unfortunately, that is just one of dozens of future scenarios, and as previously stated, none of us have a crystal ball.
Personally, I'm leaving April 2010 and I will be taking maximum commutation, as it will help pay off my mortgage, but in essence, the decision to commute is deeply personal to your own circumstances, and what is right for one person may be completely wrong for another.
I hope you find the right solution for you!:D

moonrakerz · 7 December 2008 at 2:33PM

tartanterra wrote: »

none of us have a crystal ball.

Very true, but I have a First Class Honours Degree in Hindsight - which may be of use !

I left the RN in 1986.
Pension of £3811 and gratuity of £11440.
Option of resettlement commutation gave me:
Pension of £3014 and gratuity of £16743. Pension went down £796 pa.
Gratuity was tax free, pension was taxable, so to gain a tax free lump sum of £5985 I actually lost £565 pa. (Income tax was 29% in 1986)

When I reached 55 (2001) my pension went up from £3014 to £6952 and has been index linked, anually, since then. This year it is £8426 and will rise to £8847 next year.

I won't offer any advice, but that is my story. Most people took full resettlement commutation then, I haven't regretted doing the same.

mick405 · 25 December 2008 at 6:15PM

:rotfl: Brilliant . Only a member of HM forces has that sense of humour

ghandi wrote: »

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!:T

Commutation of Army Pension - Is it worth it?

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