Commutation of Army Pension

A question about : Commutation of Army Pension

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) Ј16,761, but if I accept it, my monthly pension drops by Ј170 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 Ј16,761 they are offering, they actually take over Ј30,000 from me over the 15 year period! Which option would be best?? :confused:

Best answers:

• 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 '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.
• 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!
• 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
• 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 Ј75.00 deducted from my annual pension to pay for a commutation sum of Ј1000.00. 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 Ј75.00 per annum worse off than someone who had not commuted. This was not the case, the Ј75.00 contribution was effectively increased by the same as my pension resulting in losing Ј220.00 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.
• 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.
• 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.
• 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
• 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.
• Soldier Sam,
  I left the RN in April with 24 years pension, I commutated the maximum (Ј16,421 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 Ј16,761 (tax free) for the loss of Ј170 (taxed to Ј136) per month. With Tax free savings (i.e. cash Isa) you can put Ј7.2k away this year for you and another Ј7.2k for BH (if applicable), that's Ј14.4k 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 Ј35K; assumes interest calculated annually.
  2) Don't commutate and get an extra Ј170 a month taxed (Ј136 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 Ј170.
  This also counts as income against Child Tax Credit, etc.
  Or
  3) Tesco are doing 2 cases of Stella for Ј16, that's 2094 cases @ 20 x 284ml bottles per case! Party time!
• Sorry,
  Forgot to add.
  What is easier to spend without realising it:
  1) Ј136 a month
  or
  2) Ј16,761?
  Please note: 2094 cases are difficult to store!
• 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.