There are several versions of separation pay for servicemembers who separate from the military before serving 20 years and reaching retirement eligibility. Some continue to serve in a Guard or Reserve component to ultimately reach their 20 years of service and retire. However, at retirement, these servicemembers are surprised to find out their retired pay has been reduced because of their past separation payment.
Separation pay is considered a form of advanced retired pay, similar to the option many have to receive a lump-sum payout of a pension plan at retirement. Under the military Blended Retirement System (BRS), a lump-sum payout at retirement is now an option.
As part of an advance in retired pay, the pension payment is reduced. That’s the cost of taking a lump-sum payment. (This is standard practice in pension plans.)
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In the case of separation pay, retired pay is reduced by 40% for most, in consideration for the lump-sum advanced amount. In the case of the BRS, retired pay is reduced until age 67 in consideration for the advanced lump-sum payment.
Some individuals think they will receive a tax refund because pay agencies state that separation pay is “recouped.” However, it is not actually recouped — it’s just that retired pay is reduced in consideration for the advance. This reduction is not a taxable event, and it does not make advanced taxable retired pay refundable.
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