Pension Commutation

[Lafyar Cokov]

Hi - boring thread for all the youngsters out there - apologies to you but......

Does anyone have any particularly strong arguements for or against commuting the full allowance at an Officer's 38 point.

I realise that PPrune may not be the ideal place to take financial advice - but is probably better than someone on commission!!!!

[Wader2]

For:

If you die your estate will have the money.
You can spend it wisely.
You can invest it.

Against:

Your remaining pension will be smaller so index linking will be less.
You can invest the money to try and get higher returns but at greater risk.
You can spend it unwisely.

[South Bound]

Mad not to commute the lot. Take as much as you can up front, tax-free and take a slightly reduced pension until you are 55. Whether you offset your mortgage or just put it in the bank to earn some pennies, it is much better in your pocket up front. One of the arguments is that at least you have it and can leave it to your folks if you die - not very cheerful, but worth thinking about!

[Aeronut]

Bird in the hand is worth 2 in the bush is a fairly good reason.
Interest saved by paying off mortgage?
I think I'm right in saying that when you commute, your pension reverts at age 55. Not just adjusted for index linking but back to the non commute level so effect of commuting is not for life just till 55.

Same for PVR I think. eg take PVR table pension value and then it reverts to normal table at age 55.

[PPRuNeUser0211]

I'm with aeronut, my understanding (on the '75 scheme at least) is that you commute a percentage of your pension between your 38 point and the index linking point (or 60 point, not sure if they're the same based on what aero said) then after that it reverts to your original.

Based on that, mad not to, as 20 years worth of inflation/depreciation will affect your hard won cash if you don't commute it (up to the index link point at least), and on top of that you're losing interest you'd be earning/interest you're paying on mortgage unnecessarily.

In addition, it is there to use if you need it (if you don't schwack your house payments with it) and is there for your family if you die earlier than hoped.

On the downside, is there to be blown if you're not careful with it!

[Jaguar Pilot]

What everyone has already said is valid.

I did this back in '85, and the general rule was (still is):
If you don't need the money - commute
If you do need it - don't

I left the RAF for a very highly paid job so I didn't need the money.

Birthday 55 was a good day.:ok:

[Mr-Burns]

Is that the right way round Jag Pilot ???

[London Mil]

Aeronut is correct. Assuming AFPS 75:

Resettlement Commutation
Resettlement Commutation means the surrender of part of a pension to obtain an additional tax-free lump sum, with the restoration of the pension in full at age 55. This scheme applies to officers and other ranks who gave service on or after 31 March 1978.

AFPS Commutation document

http://www.mod.uk/NR/rdonlyres/9DE7D230-0AFB-4532-B8BD-BE20CF889A8F/0/afps75commutation.pdf

You have to be nuts not to commute as much as you possibly can.

[Yeller_Gait]

You cannot commute any of your pension if you are on the new pension scheme.

Y_G

[London Mil]

All other things being equal, yes.

[haltonapp]

And you will only pay tax at 40% (assuming you are not an F3 navigator, and can get a job better paid than at a McDonalds) on your reduced pension!
I have no regrets that I commuted, then again I was not an F3 nav!!!

[Jaguar Pilot]

Mr Burns

Yes, it is the right way round.

JP

[SixOfTheBest]

Lafyar,
Basic rule of business is a thingy called Net Present Values (NPV's). The principle is simply, if I invest x amount now, what return does that x amount gives me over the next, say, 10 years (whatever 'life' the investment has) in TODAYS MONEY. You then work out (easy peasy on Excel) what return it gives over each year and then work back to today, the TOTAL amount it generates over the period. Essentially, working back from the year of 'fruition', you decrease the amount by inflation + whatever risk factor you decide to add (expressed as a % - about 6% is not a bad figure if investing in simple/boring stuff like savings) and arrive at the following:
X amount invested today MUCH lower than return = Invest X now!
X amount invested today MUCH higher than return = Don't invest!
X amount invested today similar to return = How big are you balls?!!
Dead simple and not to teach to suck eggs.....but not many people apply this to investments and there is no difference whatsoever (in principle) between buying a piece of machinery for your business or commuting/not commuting your pension.
By the way, not a geek (honest)...still serving as FJ mate....but do have a business on the side and the MBA (of which this was part of) helped!
Short answer.....Commute the money.......WHATEVER your circumstances!

[Lafyar Cokov]

Thanks all very much

My thoughts were initially on full commutation - but looking a little closer I was just wondering what interest payments/mortgage savings would be made on a year by year basis versus the extra pension (albeit taxed) I'd receive.

I appear to have been talked back round (not just by pprune memnber honest!) to full commutation again - as the longer term benefits seem to outweigh the initial (45%) pension drop.

Thanks for all the answers/time/bored hours on pprune wondering what to type next!!

LC

[2port]

Having taken all the above into consideration - if you still can't decide you have a year from your final pay day to change your mind from "not commuting" to "commuting". So you could have the bigger pension for up to 12 months after you leave, then have another lump sum.

2P

[Jaguar Pilot]

Thank you Bigmouth.

...Jaguar pilot, you strike me as a bit of a p3n1s... Any questions?

Just one - why please?
My thoughts agree with almost eveyone else.
I took my decision after consulting a reputable pensions/financial advisor.
The internet was'nt around then, but if it had been I would certainly not have asked for advice on such an important decision on this site!

[donardboy]

I recently attended the "Financial Aspects of Resettlement" brief which all service leavers are entiltled to attend at their nearest resettlement centre. The entire brief covered pensions and was very enlightening. The chap presenting the brief explained the pros and cons of commuting and prior to the brief I did not consider commutation to include any cons.

I would strongly recommend that anyone considering commutation hold off making a decision until they have attended this brief. Most of our individual circumstances differ and what may suit Mr A may not really suit Mr B.

Best of luck

[Max Contingency]

BigmouthStrikesAgain

Welcome to PPrune.
Great first post, particularly liked the bit where you call a fellow PPruner a p3n1s.
Does your mum know that your'e on line?

[airborne_artist]

My father did a max commute - it meant he could pay off his by now ex, my Mum, without selling the house!

He had a nice line in being a miserable Lancastrian, and had stats that the majority of RN officers drew their pension for seven years, so he reckoned he'd rather have it now than leave it in HMG's bank for later.

He was nearly right - he died aged 69 and 11 months, and so he benefited on the deal. He also had the knowledge that no man in his family line had lived to seventy.

If you think you'll live to 100, then I'd suggest leaving it all in the pot.

[BigmouthStrikesAgain]

Max,

easy on wetpants. Jagmate a friend of yours?

He's come on adding little and bragging about his wealth - so I thought I'd wade in!!!

Cheers.

(there was absolutely no incahol involved. at all.:ouch: )