|Hidden Benefits Of The AFPS 05 Pension Scheme|
In 2005/06 during the lead-in period for those who were entitled to transfer their pensionable service into the new AFPS05 pension scheme, many ran scared of switching to that scheme on the misplaced assumption that “...it can’t be as good as the old one, otherwise they wouldn’t be changing things.”
David Marsh, the Pensions Secretary of the Forces Pension Society, explains details of three additional AFPS05 benefits not available in the AFPS75 scheme, that people either chose to ignore, or didn’t appreciate at that time.
The first benefit I would like to talk about is the Guaranteed Period of pension payment. Guaranteed periods are something quite alien to most Service personnel, but you may come across them if, upon leaving the Armed Forces, you take up civilian employment that has a defined contribution scheme or you end up paying into a private pension fund.
In those situations, you have a pension ‘pot’ which you can use to purchase a life time annuity and purchasing a Guaranteed Period as part of the pension ‘deal’ will help protect much of your hard earned cash.
For example, let us suppose I am a 65 year old man who has managed to save a pension fund of £100,000. I select an annuity providing company that I believe offers me a good exchange, in that they will promise to pay me £6,250 per year (no dependant’s pension and no annual increases) until the day I die for my money. I agree to the contract and hand over my £100,000. Two years later I die. What a deal..!! I handed over £100,000 of hard earned money, and all I had in return is £12,500 - and the company keeps the rest.
However, I can protect some of my pension pot by taking out a Guaranteed Period (usually you buy 5 years or 10 years protection). So, I go back to the company that is going to sell me my annuity and I ask them for a Guaranteed Period of 10 years. This will reduce my annual income from £6,250 to, say £6,125.
But, most importantly, I know that at least £61,250 of my £100,000 investment is going to come to me or, if I don’t live to see it, my estate. AFPS05 has such a Guaranteed Period – not quite as generous as 10 years, but a guarantee nonetheless.
If you do not Inverse Commute (i.e. trade some of you lump sum for an increased pension - see last month’s edition of Pathfinder for an article on this), then your pension is guaranteed to be paid for at least two years from the commencement of payment of your pension. If you do Inverse Commute some, or all, of that lump sum, then the guaranteed period will be improved from two years to a maximum of five years.
Depending on the amount of lump sum you trade, the guaranteed period will be extended; for example, if you trade in half of your lump sum the Guaranteed Period will extend to 3½ years. If you inverse commute all the lump sum the guaranteed period is five years.
So, let us assume that you have an annual pension of £15,000 and you have not inverse commuted any of your lump sum and you die eight months after your pension comes into payment, you will have been paid £10,000 of the guaranteed two years’ pension (£15,000 x 2 = £30,000), which means the remaining £20,000 is paid into your estate as a tax free lump sum.
The second benefit comes into play for those who leave before age 55 with preserved pensions and lump sums who, before age 65, are diagnosed with a terminal illness that offers a life expectancy of 12 months or less. If you should find yourself in this position then contact SPVA and let them know of the circumstances. Once SPVA are satisfied with the diagnosis they will immediately pay you the lump sum that was due to you at age 65, plus the equivalent of 2 years’ annual pension payments, tax free. It is a form of critical illness cover.
I must stress at this point that these benefits are available only to those on the AFPS05 pension scheme, not the AFPS75 scheme.
Finally, those on the AFPS05 scheme who leave with preserved pensions and lump sums that are normally payable at age 65 are able to access those benefits as early as age 55 if they so desire. However, having those benefits paid earlier than originally planned does come at a price. For each year you draw those benefits before reaching 65 the value of those benefits will be actuarially reduced. The pension reduction will be around 5% per year and the lump sum reduction around 3% per year.
For example, if somebody at the age of 59 elects to have their preserved benefits put into payment from their 60th birthday, they would expect to see the value of the pension reduce by 25% and the lump sum by 15%.
The good news for those who are on the Early Departure Payments (EDP) system and in receipt of an income stream at that point, is that even though your pension is coming into payment early, the EDP income stream continues to be paid at the same time until your 65th birthday when that system ends. I point this out because many people mistakenly believe that EDP will stop the moment the pension is drawn, even when taken earlier than planned.
This means that, for example, if at age 60 you take your terminal benefits early and are already in receipt of an EDP Income Stream, for 5 years you will receive 75% of the original pension award in the form of an EDP Income Stream, plus your pension (reduced to 75% of the original award), which amounts to 150% of the original pension award. However, be aware that once age 65 is reached the EDP Income Stream ceases and the reduced pension remains reduced until you die.
If you have any questions about your military pension, you can get immediate expert advice on the phone from the Forces Pension Society if you are a member. If not, joining is easy and inexpensive.
Please call 020 7820 9988 for more information or visit www.ForcesPensionSociety.org
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