Staff at the Forces Pension Society (FPS) tell us their in-trays are full of questions about lump sum choices when soldiers leave the Army. Your soldier’s options depend on the pension scheme they are on and at what point they hang up their beret for the final time. All three Armed Forces Pension Schemes (AFPS) have built-in flexibilities about how certain benefits may be taken. Here’s a brief overview…
When leaving the Army, or after the immediate pension point*, your soldier has the option to buy an extra tax-free lump sum, paid for from their pension before tax until age 55.
Pros: It gives them handy tax-free cash and reduces their tax bill.
Cons: Their monthly pension income will reduce and they could lose the tax advantage if they re-join as a Regular or in certain Reserve roles. This option is not available to those invalided.
* 22 years after the age of 18 for other ranks, 16 years after the age of 21 for officers
Under this scheme your soldier can opt for ‘inverse commutation’ – giving up some or all of the tax-free lump sum (which is three times the pension) in order to boost their pension income. Your soldier can do this when they draw their pension, even if the pension is an ill-health pension.
Pros: Their monthly pension income improves.
Cons: They may not live long enough to recoup the money surrendered and their tax bill may increase.
AFPS 15 EDP
The Early Departure Payment scheme gives your soldier an automatic tax-free lump sum. To qualify, they must be over 40 and have served for at least 20 years. They can choose to give up the lump sum to boost their income.
Pros: Their monthly income stream improves.
Cons: They have to surrender the whole lump sum and their tax bill can increase.
When it comes to your soldier drawing their pension, they can elect to generate a lump sum payment by relinquishing up to 25 per cent of the value of their pension. Every £1 surrendered currently gives £12 back.
Pros: There’s no automatic lump sum payment under AFPS 15 so this can be a good way to secure a tax-free cash boost. It could also reduce the tax bill.
Cons: Their monthly pension income will be reduced.