Last month the Forces Pension Society described the preserved and deferred pension rules for AFPS 05, RFPS and AFPS 15, including an example for an individual who transfers to AFPS 15 having been an AFPS 05 member
This month’s article looks at the rules governing AFPS 75 preserved and AFPS 15 deferred pensions, again, including an example of an individual with benefits in both schemes.
The majority of Service personnel do not serve until the Immediate Pension Point for AFPS 75. 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.
First a couple of points which are common to both AFPS 75 and AFPS 15.
Once a pension is preserved or deferred it is held for you 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 full CPI increase is divided 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 and, tapering off so that, if you left between 26-31 March, you would get no CPI uplift the following April.
Currently you can choose to transfer your benefits to another pension scheme but the government is planning on limiting 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 reach 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 75 preserved pensions are worked out using your rank for pension, your length of service and a proportion of the full career pension rate for your rank. To qualify for the pension of the rank you hold, you need to have been substantive in that rank for two years if you are an officer or highest paid rank for two years in the last five if you are an Other Rank (OR). Acting rank for an officer and Local Acting Rank for an OR must have been held for three years in order to entitle you to the full pension for the higher rank. If you have done more than one year but less than the two or three years required, you will get a proportionate uplift to recognise this.
Your length of service is calculated as being the years and days that you have served from age 18 for other ranks and age 21 for officers. The proportion of the full career rate (that is to say, the rate for an officer who has completed 34 years’ reckonable service from age 21, or date of entry if later, and an OR who has completed 37 years’ service from age 18, or date of entry if later) used in the calculation is 2.75% for ORs and 3% for officers. This figure is then multiplied by the length of service.
A Corporal with 12 years reckonable service would take the 37 year rate for his rank (£14,964), work out 2.75% of that figure (£411.51) and multiply it by 12. This gives a preserved pension of £4,938. The pension lump sum (also known as the Terminal Grant) is three times that amount (£14,814).
AFPS 75 has a preserved pension age of 60 for benefits earned up to and including 5 April 2006 and age 65 for benefits earned after that date. Thus all current AFPS 75 members will get their preserved benefits split into two parts: the first payable at age 60 and the second payable at age 65. If you take the second part early the actuary would reduce the amount payable to take into account the fact that the pension would be in payment longer than was originally accounted for.
A Corporal joined the RAF on 6 October 2002 aged 19 and leaves on 6 October 2014 (12 years’ service). His total preserved pension is £4,938 and his preserved pension lump sum is £14,814. His service is split 3.5 years before 6 April 2006 and 8.5 years from that date. He would get:
- At age 60 = £1,440 annual pension and a pension lump sum of £4,320; and
- At age 65 = £3,498 annual pension (which when added to the existing £1,440 pension would give a total annual pension of £4,938) and a further pension lump sum of £10,494.
If he decided to take the part of the pension due at age 65 at age 60, thus having all of his pension paid at the same time, the figures would be as follows:
The £3,498 due at 65 would be reduced to £2,718 and added to the £1,440 due at 60 giving a total of £4,158. The £10,494 pension lump sum due at age 65 would be reduced to £8,983 and added to the £4,320 payable at age 60 giving a total of £13,303. It is clear from this example that the cost of taking the second part of the preserved pension at age 60 rather than 65 is an actuarial reduction of £780 in the pension and £1,511 in the pension lump sum.
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 to take account of the fact that they will be in payment for longer. 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 75 benefits.
Staff Sergeant Bloggs leaves the Army on 31 March 2018 having given 20 years’ service. He was an AFPS 75 member before 1 April 2015 so will have a preserved pension from AFPS 75 and a deferred pension from AFPS 15.
His preserved pension from AFPS 75 will be £8,736 (2.75% of £18,687 multiplied by 17) and a lump sum of £26,208. He would get a pension of £4,119.49 and a lump sum of £12,358.47 at age 60 and a further pension of £4,616.51 and a lump sum of £13,849.53 at age 65. However, he can claim the second part early at any age after 60 (with actuarial reduction).
His deferred AFPs 15 pension 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 his service after 6 April 2015 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.
Just a couple of points about what may be to come. To begin with there is, as I have already mentioned, planned change in legislation before 1 April next year 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 pension 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.
Members of the Forces Pension Society will, of course, be kept abreast of these changes in our regular e-Newsletters.
If you find the above all rather daunting and you are a member of the Forces Pension Society, you can 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.