Tax-Free Lump Sum

Tax-Free Lump Sum Explained

You can take part of your pension as a tax-free cash sum instead of income. How it works depends on your scheme.

Under AFPS 75 there's an automatic lump sum of three times your annual pension. You don't choose it and you don't give anything up for it.

Under AFPS 15 there's no automatic lump sum. You create one by permanently giving up part of your annual pension, up to enough to generate a lump sum worth 25% of your pension's value.

The number that decides whether that's a good deal is the commutation rate, and it's fixed at 12 to 1. Every £1 of annual pension you surrender buys £12 of tax-free cash. So it takes twelve years of the pension you gave up to get back what you took — and you've also given up the inflation increases on it.

The decision is made in the six months before your pension comes into payment, and it can't be reversed.

Who is eligible?

Anyone with accrued benefits in the scheme, once you reach the point where your pension comes into payment.

The specific age depends on which scheme you're on, so that's worth confirming rather than assuming.

Under AFPS 75 you don't need to do anything, because the lump sum is automatic. Under AFPS 15 you have to actively choose it inside the six-month window.

Given it's permanent, it's worth getting independent guidance first. The Forces Pension Society does this and isn't selling you anything.

What benefits does this provide?

• Immediate Financial Support: Provides a substantial amount of money upon leaving service, helping with immediate financial needs or investments.
• Debt Reduction: Offers an opportunity to pay off existing debts, reducing financial stress and improving credit scores.
• Home purchase: A common use is a deposit, which is worth weighing against the pension income you give up for it.
• Education and Training: Funds can be allocated towards further education or vocational training, enhancing career prospects.
• Business Ventures: Enables investment in starting a business, fostering entrepreneurship among veterans.
• Retirement Savings: Allows for contributions to retirement accounts, ensuring long-term financial security.
• Tax Advantages: Being tax-free, the lump sum maximises the amount available for use, providing greater financial flexibility.
• Cash when you need it: Money up front, at the point when leaving costs most.

How do I apply?

• Check Eligibility: Ensure you qualify for a tax-free lump sum, typically available to military service leavers with a pension scheme.
• Gather Documentation: Collect necessary documents, such as your service record, pension details, and identification.
• Contact Pension Provider: Reach out to your pension provider to confirm the process and obtain any specific forms required for the application.
• Complete Application Form: Fill out the application form accurately, providing all requested information.
• Submit Application: Send the completed form and any supporting documents to your pension provider, following their submission guidelines.
• Await Confirmation: After submission, wait for confirmation from your pension provider regarding the approval and processing of your lump sum.
• Receive Payment: Once approved, the tax-free lump sum will be disbursed according to the terms of your pension scheme.

Common questions

Learn More

• GOV.UK understanding your pension: Which service counts, and when each scheme pays. gov.uk/guidance/understanding-your-armed-forces-pension
• GOV.UK armed forces pensions: Scheme guides, forms and contact routes. gov.uk/guidance/pensions-and-compensation-for-veterans
• Discover My Benefits AFPS 15: Your service's own summary of the current pension scheme. discovermybenefits.mod.gov.uk
• GOV.UK tax on your pension: How pension income and lump sums are taxed. gov.uk/tax-on-pension
• Forces Pension Society: Independent guidance on armed forces pensions. forcespensionsociety.org