|Is It Wise To Transfer My Pension?|
This is a common question raised by individuals who are in the throes of leaving the Armed Forces with preserved pension benefits that offer the option of transferring the value of those benefits out of the Armed Forces Pension Scheme (AFPS) and into another scheme. Lieutenant Commander David Marsh, the Pensions Secretary of the Forces Pensions Society, looks at this vexing issue from an objective point of view
In most cases when a member of the staff of the Forces Pension Society is asked if an individual can transfer their Armed Forces Pension out of the AFPS and into another scheme, it is usually with the aim of being able to get hold of 25% of the value of that pension in the form of a tax free lump sum at the earliest age possible i.e. 55.
The answer to that question depends on the pension scheme to which you belong.
If you are a member of the AFPS75 pension scheme and have already passed the point at which you are entitled to leave the Services with the award of an immediate pension and lump sum; then transferring the value of those benefits out of the AFPS is not permitted. If you are entitled to receive only preserved pension benefits because you have not served sufficiently long enough to leave with immediate benefits, and therefore cannot access those preserved pension benefits until age 60 and/or 65 (under normal circumstances) at the earliest, then by transferring the value of your preserved benefits into a personal pension plan, or some other form of money purchase plan, you would gain the chance of having the value of those preserved benefits put into payment as early as age 55 - if you want to do that.
However, be aware that the value the Government Actuary’s Department (GAD) assigns to preserved pension benefits is far too low to enable you to purchase a regular income remotely similar in the private sector. The GAD’s value is the true cost to the AFPS of providing those benefits without the need to build in a profit, and if you want an idea of how much that same value would buy on the open market, on the assumption that you were aged 55, you will notice that it is considerably less than the amount of annual pension and lump sum awarded as preserved benefits under the Armed Forces Pension Scheme.
Try the annuity calculator at the following website for an idea of commercial worth: www.find.co.uk/pensions/annuities_centre/annuities-calculator You will probably be sable to purchase an entitlement that is around 50% or less (for an index linked pension that also pays 50% dependant’s benefits) than the annual pension award you would earn for your time in the Armed Forces. This exercise gives you an idea of just how much money private sector providers take from a pension fund for themselves before they pay a life time annuity.
So is it wise to move it? Under normal circumstances the FPS would have to say the answer to that question is a resounding “NO”. But one cap does not fit all. There are occasions when, in specific personal circumstances, the transfer of your Armed Forces pension out of the AFPS and into a private pension plan, in order to allow access to 25% of the value as a tax free lump sum at age 55, is the right thing to do. If you are unsure about whether such a transfer would be appropriate given your own position, it is most important that you consult with a registered Financial Advisor – somebody who is licensed to appraise your financial position and determine whether liquidation of every available asset is appropriate in your own case.
If they get it horribly wrong, you may have the possibility of suing them for bad advice given.
What about those on the AFPS05 scheme I hear you ask? As the AFPS05 scheme is an Inland Revenue approved scheme, it is permitted to pay you your preserved pension benefits from the age of 55 anyway. However, you have to appreciate that if you are going to draw those benefits ten years earlier than planned, the Government is not going to allow you to receive sums of money as high as the level originally calculated and awarded to you, on the basis that payment begins at age 65. Indeed, there will be a reduction in the amount payable to reflect the fact that those benefits are going to be paid over a much longer period than originally envisaged. Furthermore, the reductions will not be the same percentage for the pension and the lump sum.
If you draw your AFPS05 pension benefits at age 55 instead of age 65, at current rates, you are likely to suffer a reduction in the pension of around 44.5% of the value of the regular income and around 28.8% of the value of the lump sum. But do the cost analysis yourself before making a commitment one way or the other.
If you apply to transfer the value of your AFPS05 benefits out of the AFPS and into a private fund at age 55, ask your financial advisor to calculate the amount of lump sum and regular pension payments that value will buy you in the private sector and see whether or not it stacks up against drawing your preserved benefits from the AFPS05 scheme at age 55 instead.
The FPS is not allowed to give actual financial advice. However, if you are considering transferring your preserved pension out of the AFPS into a private scheme before you reach age 55, ask yourself the question: “What happens to the money?” The reason for suggesting this is that if you transfer the value earlier than age 55; it will almost certainly end up invested in world stock markets, which are subject to fluctuations in value.
This means that whilst the value of your pension could potentially rise faster than inflation, it could also fall below the level at which you first made your investment. By comparison, the AFPS preserved benefits are guaranteed to increase in line with inflation on an annual basis. This is a level of protection you might want to ponder over for some considerable time!
If you have any questions about your Armed Forces pension and you are a member of the Forces Pension Society, you can find answers by looking at the Society’s web site or by calling the dedicated help line on 020 7735 0110. If you are not yet a member, the cost is modest and benefits (in addition to advice from an expert) include numerous discounts on a range of useful products and services and the assurance that a dedicated organisation, independent of the Government, is there to help you get the most from your Armed Forces pension.
For more information, go to www.ForcesPensionSociety.org
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