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|Aggregation – What Is It And Does It Matter?|
The Forces Pension Society explain the aggregation of AFPS 75 and AFPS 05 benefits and the difference this could make to you...
It is surprising how many people who can’t wait to leave the Armed Forces end up re-joining a year or so later. If they left with two years or more reckonable service during their first period of service they will have been awarded a preserved pension on completion of that earlier period of service, which is not affected by the pension rules in place for their latest period of service unless they elect otherwise.
Combining two periods of service together so that two periods of pensionable service can count as one period of service is known as aggregation. What are the advantages and disadvantages of aggregation and why does it matter to you? This article looks at aggregation of AFPS 75 and AFPS 05 benefits – that could be AFPS 75 + AFPS 75, AFPS 75 aggregated into AFPS 05, or AFPS 05 + AFPS 05 - so all service is counted for a single pension entitlement, and what a difference aggregation could make.
AFPS 15 does not permit aggregation for two reasons: first, AFPS75 and AFPS05 pension schemes are final salary schemes and AFPS15 is not – it is a career averaging scheme. Secondly, it doesn’t need to, as any break in service of less than 5 years is ignored and service is taken as continuous. However, the aggregation of AFPS 75 and AFPS 05 benefits can have an impact on how benefits are awarded for those who were transferred to AFPS 15 on 1 April 2015.
When a preserved pension is awarded, it sits as a liability (or commitment) of the scheme, building up by Consumer Prices Index (CPI) rises each year, until the preserved pension age for the scheme when it becomes payable. The preserved pension age for AFPS 75 is age 60 for any part of the pension earned up to and including 5 April 2006 and age 65 for service after that date. The part of the pension payable at age 65 may be claimed at age 60 but it will be reduced to take into account that it is being paid early – this adjustment is called an actuarial reduction. For AFPS05 preserved pensions are paid at age 65 but may be claimed at or after age 55 with actuarial reductions.
When an individual re-joins the regular Armed Forces in most cases he or she goes on to become promoted and under normal circumstances pay-rises are awarded on a regular basis. Once aggregated, preserved benefits will be counted in the individual’s rank at discharge for AFPS 75 or at the individual’s final pensionable salary for AFPS 05. The right to aggregate AFPS75 and AFPS 05 preserved benefits is protected, which means that you can choose to aggregate, or unaggregate, at any point while you are still in active regular service. That is the theory, so let’s look at a couple of examples:
Example 1 – a Captain leaves the Army on 1 April 2003 after 6 years service, with a preserved pension. He re-joins the Army on 31 March 2004 and leaves again on 31 March 2016 as a Major.
If he did not aggregate he would leave with a second AFPS 75 preserved pension in respect of his service from 31 March 2004 to 31 March 2015 and a deferred AFPS 15 pension payable at his State Pension Age (so, at least age 67) in respect of the remaining year of his service. He would qualify for the AFPS 75 Resettlement Grant of £15K.
If he did aggregate he would leave with an immediate pension based on 16/17ths (or about 94%) of the 17 year rate for a Major, with a tax free lump sum of three times that amount, and a deferred AFPS 15 pension in respect of his final year of service. Using the PVR rates for a Major, his pension would be approximately £13,800 a year and his lump sum would be just over £41,000.
Example 2 – A Sergeant leaves the Royal Air Force on 1 June 2004 after 12 years service (he is exactly 30 years old when he leaves). He re-joins the Royal Air Force on 1 June 2005 and serves until 31 March 2016 as a Warrant Officer a salary of £45K.
If he did not aggregate, as well as the preserved pension he has already earned for his first period of service, he would leave with an AFPS 05 preserved pension in respect of his service from 1 June 2005 to 31 March 2015 and a deferred AFPS 15 pension payable at his State Pension Age (so, at least age 67) in respect of the remaining year of his service.
If he did aggregate he would leave a single preserved pension and lump sum payable at age 65 relative to 22 years’ service on the AFPS05 pension scheme, and a deferred pension from his single year spent on the AFPS15 scheme payable at his State Pension Age, but more importantly PLUS benefits from the Early Departure Payment (EDP) Schemes applicable to both AFPS05 and AFPS 15 payable immediately on exit.
His EDP benefits from AFPS 05 would be:
A lump sum worth three times the preserved pension he had built up in that scheme – so assuming an annual pension entitlement of £13,392 the lump sum would be (£13,392 x 3 =) £40, 176; and an EDP income of 50% of his preserved pension – £6,696 per year, rising to 75% of preserved pension at age 55 and increasing by all the CPI increases which occur between exit date and age 55. The EDP income stream stops at age 65 when preserved benefits are payable – but, remember, you can claim AFPS 05 preserved benefits as early as age 55 (albeit, with the actuarial reductions in value) and early payment of your pension does not mean early cessation of your EDP income; that will continue to be paid until age 65 regardless.
His EDP benefits from AFPS 15 would be:
Example 3 – an individual has preserved benefits in AFPS 75 having served for 7 years, leaving as Lance Corporal. On re-joining the Army, she became an AFPS 05 member who was subsequently transferred to AFPS 15. She was to be discharged on medical grounds with a Tier 1 condition in Spring 2016. This means that pension benefits are preserved or deferred and that a Tier 1 lump sum is payable. This Tier 1 lump sum is worth 1/8th of pensionable pay for each year of service, with a minimum of 6 months’ pensionable pay and a maximum of 2 years’ pensionable pay. How could she leave with the greatest sum possible to set herself up in civilian life?
If she did not aggregate she would have had a total of 7 years service in AFPS 05 and AFPS 15 which would have resulted in a Tier 1 lump sum of about (7/8 x £32K) £28K.
If she did aggregate she could count all 14 years service for the Tier 1 calculation which will double her Tier 1 lump sum. Her preserved AFPS 05 pension would be based on 13 years’ service at her pensionable rate of pay at discharge (she had been promoted to full Corporal).
These examples show the advantage of aggregation but you have to look carefully the potential cost of aggregating benefits. If you serve until age 55, there is no issue at all – your pension will be paid straight away and it will be index linked to CPI thereafter. If, however, you leave before age 55 (and most people do) you need to take into account that if you are aggregating AFPS 75 benefits with those of AFPS 05, once aggregated, preserved pension age for all benefits is 65.
You need to weigh up carefully the amount you could have received between age 60 and 65 from AFPS 75 benefits earned before 6 April 2006 against what you will gain from your AFPS 05 benefits being calculated using your Final Pensionable Salary at your date of discharge and any EDP benefits which may be due. Looking at example 3 above, the individual concerned had to weigh up whether £28K extra tax free at the point when she was having to – unexpectedly – settle back into civilian life was worth more to her than the amount she would have received between age 60 and 65 from that part of her AFPS 75 pension earned before 6 April 2006.
In the vast majority of cases individuals are better off aggregating but it is not a ‘given’ and you should analyse the figures to ensure you are making an informed decision. We would not recommend aggregation if your preserved benefits are in respect of service in a higher rank or at a higher rate of pay than your new service – this happens when people serve for, say, 12 years, leave and then re-join as a member of the Military Provost Guard Service (MPGS). They would have to join the MPGS at the rank of Private and work their way back up. In these circumstances, it would probably be sensible to wait until you have a few MPGS promotions under your belt and then do the sums before launching down the aggregation road.
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