If your family is approaching a return to civilian life there will be important choices about lump sums that you must understand. Here 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’.
*Figures correct at time of writing 09/09/2024
