If your family is approaching a return to civilian life there will be important choices about lump sums that you must understand.
In this article written for the Autumn issue of Homeport Magazine we describe the different lump sums 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 you 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 but no options.
- AFPS 15 has no automatic pension lump sum. One can be generated by commuting (or 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:
Petty Officer Bloggs left the Royal Navy on 1 April 2021 at age 40 with exactly 22 years reckonable service. His final pensionable pay was £40,000. Currently, he would have AFPS 15 and AFPS 75 or AFPS 05 benefits as follows:
From AFPS 15:
£5,200 pension payable at his state pension age (SPA) when he can commute – rule of thumb: £1 surrendered generates £12 tax-free. Using the current pension value, the maximum lump sum he can generate is:
(Pension x 20/56) x 12= £22,285.68
The pension remaining would be £3,342.86pa.
An AFPS 15 EDP tax-free lump sum of £11,700 and EDP income of £1,768pa. If he gave up the lump sum, his taxable EDP income would increase by £635.31pa.
From AFPS 75:
An AFPS 75 IP of £8,637 and a tax-free lump sum of £25,911. Were he to take the maximum commutation lump sum(£18,654), his pre-tax pension would be reduced by £1,751.98pa until age 55.
From AFPS 05:
£9,142.86 pension and tax-free lump sum of £27,428.56, preserved until age 65. For each £100 of lump sum he gives up, his pension improves by £6.07pa. If he surrendered the whole of his lump sum, his taxable pension would increase by £1,664.91.
An AFPS 05 EDP tax-free lump sum of £9,142.86 and EDP income of £4,571.43, with no choices.
Written for the Naval Families Federation Autumn 21 issue of Homeport
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