|Preserved and Deferred Pensions Explained – Part 1|
Last month the Forces Pension Society explained the rules for preserved pensions in AFPS 75 and deferred pensions in AFPS 15. This month we concentrate on current members of AFPS 05 who will leave with a preserved pension and we give an example of the impact of service beyond 1 April 2015 for those of you who will be transferring to AFPS 15 and the benefits payable under it
Most of the AFPS 05 information we will give will also be relevant to the pension scheme for reserves (RFPS) members and we will highlight where the rules differ.
The majority of Service personnel do not serve until the age 55 for AFPS 05 members, or age 60 for RFPS and AFPS 15 members, thus their pensions from these schemes will be preserved or deferred.
It is important to know what you have earned, what your options are and (if you do not transfer your benefits out of the Armed Forces Pension Scheme when you can draw them.
Before addressing the rules for each scheme, a recap on a couple of points common to all:
Once a pension is preserved or deferred it is held until the age at which the rules allow you to draw it (these differ from scheme to scheme) but its value increases each year in line with the September Consumer Price Index (CPI) rate. The first year’s increase is proportionate. The increase table is set by Government and divides the full CPI increase in to 13 bands reducing as the year passes.
So, for example, if you left at the beginning of April, you would get the full CPI uplift the following April, tapering off so that, if you left between 26-31 March, you would get no CPI uplift the following April. CPI is the current pension increase measure and we refer to it elsewhere in this article but it is set by government and could change.
Currently you can transfer benefits to another pension scheme but the government is planning to limit the right to transfer benefits from unfunded schemes (all Armed Forces pension schemes are unfunded schemes). The current position is that, to do this you need to ask Veterans UK for a Cash Equivalent Transfer Value and then ask your new pension provider what that sum would buy in their scheme.
Before agreeing to the transfer we suggest that you seek financial advice as the benefits offered by the new scheme may have drawbacks that are not immediately obvious and in current market conditions may not provide as much income, if you live as long as normally expected.
If you are unable to undertake full time employment due to mental or physical disability and the prognosis is that this disability will continue until you are preserved or deferred pension age, you can ask to have your benefits paid early, without actuarial reduction and with CPI increases. It is Veterans UK who should be approached and it is their staff and doctors who will consider your claim and the medical evidence you submit.
It is up to individuals to claim their preserved or deferred benefits and we suggest that you write to Veterans UK 6-9 months before your preserved or deferred pension age. This will give them time to retrieve the file relating to your service, review your pension award and ask for any supplementary information they may need.
AFPS 05 preserved pensions are worked out by multiplying your final pensionable salary by your length of service, and dividing by 70. Final pensionable salary is the highest 365 consecutive days’ pay in the last three years of service, with pay in years one and two increased by CPI. Your length of service is all of your paid service in years and days, irrespective of the age at which you joined the Armed Forces.
The preserved pension of a Staff Sergeant with a Final Pensionable salary of £38,760 and 23 ½ years service would be:
£38,760 x 23.5 / 70 =£13,012
His preserved pension lump sum would be £39,036
NB: You must give 2 years reckonable service to qualify for a preserved pension.
AFPS 05 has a preserved pension age of 65 but the scheme rules allow the pension to be claimed as early as age 55 (the earliest HMRC will allow, except for ill-health pensions). If pension benefits are claimed early they will be reduced by the actuary. If you qualify for Early Departure Payments (EDP) Scheme benefits and choose to have your preserved pension paid early, you will be entitled to receive both at the same time.
Taken at age 55 the pension would be reduced by 44.6% and the lump sum would reduce by 28.8%.
- Taken at age 55 with EDP = income stream worth 75% of preserved pension + 55.4% of pension = 130.4% worth of preserved pension value
- Taken at age 62 with EDP = income stream worth 75% of preserved pension + 82.7% of pension = 157.7% worth of preserved pension value
Take financial advice is you are considering doing this as EDP income stops at age 65.
RFPS pensions are calculated in the same way as AFPS 05 pensions and RFPS preserved pensions are payable at age 65. RFPS members are not required to give 2 years reckonable service to qualify for a preserved pension – they have rights to a preserved pension, irrespective of length of service. These preserved pensions, too, may be claimed at any age from age 55 with actuarial reduction but RFPS members are not eligible for payments under the EDP Scheme.
AFPS15 deferred pensions are calculated using 1/47th of your rate of pay for each year with earlier years increased in line with Average Earnings.
Salary received between 1 April 2015 and 31 March 2016 = £784.77
If Average Earning uplift for 1 April 2017 is 2.78%, the value of this £784.77 is increased by 2.78% to £806.59.
The pension earned between 1 April 2016 and 31 March 2017 is then added on. So, if salary is £7,335, 1/47th is £794.36, giving a revised pension value of £1,600.95 (£806.59 + £794.36)
AFPS15 deferred pensions are payable at your State Pension Age but they can be claimed from age 55 but, again, the actuary will reduce them. There is no automatic pension lump sum in AFPS 15 but you can give up your pension to generate one. The largest lump sum you can generate is 25% of the pension pot (this is the HMRC limit). As to the value, put simply, for every £1 of annual pension you surrender you buy a £12 tax free lump sum.
Many of you will be transferring to AFPS 15 on 1 April 15 and will have benefits from more than one scheme. The following is a simple example of an individual with a combination of AFPS 15 and AFPS 05 benefits.
Staff Sergeant Bloggs leaves the Army on 31 March 2018 having given 20 years service. He was an AFPS 05 member before 1 April 2015 so will have a preserved pension from AFPS 05 and a deferred pension from AFPS 15.
His preserved pension from AFPS 05 is £9,228.57 (final pensionable salary at date of discharge (£38K) multiplied by 17 years reckonable service, then divided by 70). His preserved pension lump sum is £27,685.71. Both are payable at age 65 but he can claim it early at any age after 55 (with actuarial reduction).
His deferred pension from AFPS 15 is £2,431.33 (assuming salary of £36,500 in 2015/16, £37,000 in 2016/17 and £38,000 in 2017/18 accrued at 1/47 per year with earlier years’ accruals increased by 2.5% the Earnings Index). This is payable at his State Pension Age but can be claimed at any age after age 55 (with actuarial reduction). There is no lump sum with this deferred pension but he can give up pension to generate a lump sum of up to 25% of the value of the pension.
These preserved and deferred figures will increase annually from the date of departure by CPI. Once in payment, the pension will increase by CPI every year thereafter.
He may be entitled to EDP benefits in respect of either or both periods of service if he is at least age 40. If he qualifies, he is entitled to keep his EDP income irrespective of whether or not he claims his preserved or deferred benefits early.
Finally, to recap on a point made at the end of last month’s article, there are changes planned to the legislation that will restrict transfers of pension values out of the AFPS schemes into another scheme outside the public sector.
In particular the government intends to prevent pension benefits being transferred to overseas schemes – but this new rule will not affect those drawing their AFPS pensions overseas. Further, when the State Pension Age increases to 67 in 2026 it is most likely that the minimum age a pension will be payable to anybody under normal circumstances will increase from 55 to 57.
If you find the above all rather daunting to digest and you are a member of the Forces Pension Society, you be kept abreast of these changes in regular e-Newsletters. You can also call the dedicated help line on 020 7735 0110 or find answers on the Society’s web site. 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
|Last Updated ( Friday, 14 November 2014 )|
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