The majority of Service personnel do not serve until the Immediate Pension Point for AFPS 75 or the Normal Pension Age for either AFPS 05 (age 55) or AFPS 15 (age 60). This normally results in the award of a preserved or deferred pension. It is important to know what you have earned, what your options are and, if you do not transfer your benefits out of the scheme, when you can draw them…
First a couple of points which are common to all three schemes:
Once a pension is preserved or deferred it is held by the scheme until you reach the age at which the scheme rules allow you to draw it but its value increases each year in line with the September Consumer Price Index (CPI) rate. The first year’s increase is proportionate. So, for example, if you left at the beginning of April, you would get the full CPI uplift the following April, if you left in October half way through the pension calendar year, you would get about half of the 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.
You can choose to transfer your benefits to another final salary pension scheme within the UK. 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 do seek financial advice as the benefits offered by the new scheme may have drawbacks that are not immediately obvious.
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 early, without any reductions and with CPI increases. To claim, submit an AFPS Form 8 (available online) to Veterans UK. Their staff and doctors will consider your claim and the medical evidence you submit.
It is up to you to claim your preserved or deferred benefits. We suggest that you submit your AFPS Form 8 six to nine months before preserved or deferred pension age. This will give Veterans UK 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 published in the Pension Code in force at the date of your retirement.
Your rank for pension is:
- Officers: substantive rank held for two years or acting rank held for three years;
- Ors: highest paid rank for two years.
If you have more than one year but less than the two or three years required, you will receive a proportionate uplift to reflect the service at the higher rank. Your length of service is calculated as being the years and days that you have served from age 18 for ORs and age 21 for officers. The multipliers used to work out the preserved pensions are 3% of the 34 year pension rate for your rank if you are an officer or 2.75% of the 37 year pension rate for your rank if you are an OR. 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 (£15,113), take 2.75% of that figure (£415.61) and multiply it by 12. This gives a preserved pension of £4,987. The Terminal Grant (TG) is three times that amount (£14,961).
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 preserved AFPS 75 benefits for those currently in service will be split into two parts: the first payable at age 60 and the second payable at age 65. However, the second part may be claimed as early as age 60 – but it would be reduced to take into account the fact that the pension would be in payment longer than was originally accounted for – this is called ‘actuarial reduction’.
A Corporal joined the RAF on 6 October 2002 aged 22 and leaves on 6 March 2015 (12 years’ service). His preserved pension is £4,987 and his preserved TG is £14,961. His service is split 3.5 years before 6 April 2006 and 8.5 years from that date. If he takes the first part at age 60 and the second part at age 65 he would get:
- At age 60 = £1,454 annual pension and a TG of £4,362; and
- At age 65 = £3,533 annual pension (which when added to the existing £1,454 pension would give a total annual pension of £4,988) and a further TG of £10,599.
If he decided to take the second part of the pension early at age 60, the figures would be as follows:
- The £3,533 due at 65 would be reduced to £2,816 and added to the £1,454 payable at 60 giving a total of £4270. The £10,599 TG due at age 65 would be reduced to £9,391 and added to the £4,362 payable at age 60 giving a total of £13,753
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 £717 in the pension and £1,208 in the TG.
AFPS 05 pensions are calculated by multiplying length of service by final pensionable pay and dividing by 70. The lump sum is three times the pension. Preserved benefits are payable from age 65 but they can be claimed from age 55 with actuarial reductions. If claimed at age 55 the reduction would be 44.6% in pension and 28.8% of the pension lump sum.
When the pension is claimed – early or not – you will need to decide whether you want to ‘inversely commute’. Inverse commutation means that the tax free lump sum is given up in part (units of £100) or in full in order to improve the taxable pension. £100 inversely commuted at age 65 buys a male £6.10 per year more pension or £5.20 for a female (as statistically females live longer than males). If you are considering this option, you should seek financial advice as it might be possible to identify a way of providing you with extra income whilst keeping your capital reasonably available.
AFPS15 pensions are based on 1/47th of annual pensionable pay, with earlier years increasing by the Earnings Index. Deferred pensions are payable at your State Pension Age but they can be claimed from age 55 with actuarial reductions. There is no automatic pension lump sum in AFPS 15 but you can give up some of your pension to generate one. Rule of thumb is that £1 surrenders generates a £12 lump sum. The largest lump sum you can generate is 25% of the pension pot (this is the HMRC limit). This is not a straight 25% of your pension. For example the largest lump sum available with an AFPS 15 pension of £2,000 is £8,571.42, and the pension remaining in payment would be £1,285.71,
Most of you have a combination of benefits following your transfer to AFPS 15 on 1 April 15. The benefits in each scheme are separate and will be paid at the points set out above. The following is a simple example of an individual with a combination of AFPS 15 and AFPS 75 benefits.
Staff Sergeant Smith 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 AFPS 75 preserved pension (based on his rank for pension at his date of discharge) will be £8,911.95 (2.75% of £19,063 multiplied by 17) and a TG of £26,735.85. A pension of £4,193.86 and a TG of £12,581.58 is payable at age 60 with the second part payable at age 65, but he can claim the latter as early as age 60 (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 from age 55 (with actuarial reduction). There is no automatic lump sum but he surrender pension to generate a lump sum of up to 25% of the value of the pension. In this case £868.33 is the maximum which could be surrendered. This would generate a lump sum of £10,419.99.
As I explained above, these preserved and deferred figures will increase by CPI annually from the date of departure.
He may be entitled to EDP benefits in respect of his service after 1 April 2015 if he is at least age 40. If so, he is entitled to keep his EDP income even if he claims his preserved or deferred benefits early.
If you are a member of the Forces Pension Society and have any questions about preserved/deferred benefits or, indeed, any other pension issue contact us email@example.com
If you are not a member but would like to know more about the Society, visit us atwww.forcespensionsociety.org