Image of Mary Petley from Forces Pension Society

Friday 27th May 2022

Are you approaching a return to civilian life in the next couple of years? If so, there will be important choices about lump sums that you must understand. In his article, Mary Petley of the Forces Pension Society describes them and their implications.

The options are:

  • AFPS 75 provides an automatic tax-free lump sum of three times the pension. Those leaving with an Immediate Pension (IP), but not an invaliding pension, can choose to buy another lump sum and pay for it from their pre-tax pension between their retirement and age 55.  This is called Resettlement Commutation which can be tax-efficient as it reduces ‘earned income’.
  • AFPS 05 provides an automatic tax-free lump sum of three times the pension. Members may choose to give up some or all of this lump sum to improve their taxable pension. This is called Inverse Commutation and may increase your tax bill as it increases ‘earned income’.
  • The AFPS 05 EDP scheme provides an automatic tax-free lump sum normally worth three times the pension to those who have given at least 18 years service and are at least age 40 on discharge. There are no options in respect of this lump sum.
  • AFPS 15 has no automatic pension lump sum. One can be generated by surrendering pension, which may reduce tax liability as it reduces ‘earned income’.
  • The AFPS 15 EDP scheme provides an automatic tax-free lump sum of 2.25 times pension to those who have given at least 20 years service and are at least age 40 on discharge. The EDP lump sum can be surrendered to improve EDP income – this may increase tax liability by increasing ‘earned income’.

Here’s an example using current pay and pension rates, and assuming that the individual opts to have all service after 31 March 2015 counted in AFPS 15:

Sergeant Bloggs leaves the Royal Air Force on 1 April 2024 at age 40 with exactly 22 years’ reckonable service and final pensionable pay of £42,000. Benefits would be due from AFPS 15 and AFPS 75 or AFPS 05 as follows:

From AFPS 15:

£8,000 pension payable at state pension age when they can commute – rule of thumb: £1 surrendered generates £12 tax-free.  In this case, the maximum lump sum would be £34,285.71 (Pension x 20/56 multiplied by 12) reducing the pension to £5,142.86 p.a.

An AFPS 15 EDP tax-free lump sum of £18,000 and EDP income of £2,720 p.a.  If the lump sum was surrendered, the taxable EDP income would increase by £977.40 p.a.

PLUS

From AFPS 75:

An AFPS 75 IP of £7,018.23 and a tax-free lump sum of £21,054.69.  Were he to take the maximum commutation lump sum (£11,023), his pre-tax pension would be reduced by £1,036.23 p.a. until age 55.

OR

From  AFPS 05:

£7,800 pension and tax-free lump sum of £23,400, preserved until age 65.  As each £100 of lump sum surrendered improves the pension by £6.07 p.a., the pension could be improved by a maximum of £1,420.38 p.a.

An AFPS 05 EDP tax-free lump sum of £23,400 and EDP income of £3,900, with no choices to make.

If you are a Member of the Forces Pension Society and have pension-related questions, contact [email protected] 

To learn more about us, visit the Forces Pension Society website

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See also: RAFFF’s Financial Matters section

 

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