Armed Forces Pension Trivial Commutation

What trivial commutation is

Trivial commutation swaps a whole pension for a single lump sum. It is not a partial cash-out: the payment "discharges all liabilities" for that pension, so nothing more is paid to you, and contingent benefits for a spouse or partner end with it. There is no way back once it is paid.

All three armed forces schemes have the power to do it: rule J.10 for AFPS 75, rule J.8 for AFPS 05 and regulation 116 for AFPS 15. In each case it is discretionary. The scheme "may pay" a lump sum, the member must consent, and the amount is what the scheme actuary advises the pension is worth. It is a request you make, not an entitlement you claim.

It is also only for small pensions, because the tax rules set the limits. Those limits are what the checker above tests.

The two routes: £30,000 and the £10,000 small pot

HMRC allows a small defined benefit pension to be cashed in under two separate rules. They are often merged into one sentence, which is how people end up thinking their pension qualifies when it does not.

The £30,000 figure is the commutation limit in Finance Act 2004 schedule 29. The value is fixed on a date you nominate, which must fall in the three months before the first payment, and every payment must then be made within twelve months. The small pot rule comes from separate regulations. HMRC's conditions for occupational and public service schemes set no limit on how many small pots a member can take; the limit of three applies to personal pensions.

How HMRC values your AFPS pension for the test

The test does not use the lump sum Veterans UK would pay. It uses HMRC's own valuation. For a pension that has not started, that is 20 times the yearly pension plus any separate lump sum. For a pension already being paid, it is 20 times the yearly amount.

On AFPS 75 and AFPS 05 the automatic lump sum of three times the pension is a separate lump sum, so each £1 of deferred pension counts as £23. AFPS 15 has no automatic lump sum, so £1 counts as £20. That puts the ceilings very low:

In service terms that is very little. Two years on AFPS 05 at £45,000 builds about £1,286 a year, valued at about £29,571, just under the line with nothing else held. Two years on AFPS 15 at £35,000 builds about £1,489, valued at about £29,787. Anyone with more than two or three years' service, or with a workplace pension from a later job, is usually over £30,000 once everything is added up.

What each AFPS scheme allows

The tax rules set the outer limits. The schemes and the MOD's policy decide what Veterans UK will actually agree to, and here the three schemes differ.

The AFPS 75 position comes from the MOD's policy manual for the scheme, JSP 854: members who left on or after 1 April 2017 "can opt to trivially commute their pension from age 55", worked out on a reduced amount if they apply before the pension is due. That rule is AFPS 75 only. No current MOD statement gives the earliest age for AFPS 05 or AFPS 15, so ask Veterans UK rather than assume the AFPS 75 rule carries over.

Members with a guaranteed minimum pension (GMP) face an extra condition: the AFPS 75 and AFPS 05 rules require State Pension age for a pension that cannot fall below the guaranteed minimum.

There is no upper age limit in the tax rules. The old cap at 75 was removed by the Finance Act 2011, although the July 2020 AFPS 75 booklet still describes trivial commutation as available "over the age of 55 but below 75". If you are 75 or over, ask Veterans UK whether the MOD still applies that limit as policy.

Age 55, and why 2028 does not change it for the AFPS

The tax rules require you to have reached the normal minimum pension age, unless the ill-health condition is met or you have a protected pension age. That age is 55.

From 6 April 2028 it rises to 57 for most pension schemes, but uniformed services schemes are exempt: the Finance Act 2004, as amended in 2022, keeps 55 for schemes for the armed forces, police and firefighters. So an AFPS pension can still be commuted from 55 after 2028, scheme rules permitting, while a civilian pension you hold alongside it is locked until 57. The MOD's AFPS 75 policy manual, JSP 854 of April 2022, still says the age moves to 57; for the AFPS the law says it does not.

How the lump sum is taxed

If the pension has not started, 25% of the lump sum is tax-free and the rest is taxed as pension income in the tax year it is paid. If the pension is already being paid, all of it is taxable. This follows section 637G of the Income Tax (Earnings and Pensions) Act 2003.

When the lump sum is the first and only payment from the pension, HMRC's payroll guidance tells the payer to use tax code BR on a month 1 basis: a flat 20% on the taxable part. That can take too much from someone with little other income and too little from a higher rate taxpayer. Overpaid tax can be reclaimed in the same tax year on form P53.

A trivial commutation lump sum does not use up any of your lump sum allowance, but you must have some allowance left for it to be paid. Small pot payments neither need nor use the allowance.

How to ask Veterans UK

There is no trivial commutation form on the Veterans UK forms page. Form 9 covers AFPS 15 commutation at retirement and inverse commutation, not this. The route is to contact the scheme administrator, Veterans UK, through the JPAC Enquiry Centre on 0800 085 3600 or by email to [email protected]. If your pension is already being paid, ask for small pot commutation the same way; Equiniti Paymaster pays pensions but does not decide this.

Veterans UK will work out the amount on the Government Actuary's Department factors for trivial commutation, Tables 601 and 602, keyed to your exact age. GAD's terms do not allow those tables to be reproduced, which is why this page tests eligibility but does not estimate the payment. Expect the figure Veterans UK quotes to differ from the HMRC test value in the checker.

Is cashing in a small pension a good idea?

It depends on what you give up. An armed forces pension is guaranteed, rises with CPI each year in payment and carries benefits for a spouse or partner. A lump sum ends all of that, and part of it is taxed. Set against that, a few hundred pounds a year can be awkward to keep track of, and a preserved pension that is never claimed pays nothing at all.

Before you ask, check what else you hold, because the £30,000 test counts every pension. Ask for a Form 14 forecast so you know the exact yearly figure, and remember that the decision is irreversible. For a larger sum, or if your other pensions are close to the limit, regulated financial advice is worth having.