MONEY Hidden Benefits of the D
uring the lead-in period for those who were entitled to transfer their pensionable service into the new
AFPS05 pension scheme many ran scared on the misplaced assumption that “It can’t be as good, otherwise they wouldn’t be changing things.” Here David Marsh, explains additional AFPS05 benefits not available in the AFPS75 scheme, that people may not have appreciated.
Guaranteed Periods Guaranteed periods are quite alien to most Service personnel, but you may come across them in civilian employment with a defined contribution scheme or if you end up paying into a private pension fund. In those situations, you have a pension
‘pot’ you can use to purchase a life time annuity. Purchasing a Guaranteed Period as part of the ‘deal’ will help protect your cash.
Let us suppose I am a 65 year old man who has saved a pension fund of £100,000. I select an annuity providing company that offers me a good exchange, that promises to pay me £6,250 per year (no dependant’s pension and no annual increases) until I die. I agree to the contract and hand over my £100,000. Two years later I die. What a deal..! I handed over £100,000 and all I had in return was £12,500 – and the company keeps the rest.
I can however, protect some of my pension pot by taking out a Guaranteed Period (usually 5 or 10 years protection). So, I go back to the company and ask them for a Guaranteed Period of 10 years. This will reduce my annual income from £6,250 to, say £6,125. But, most importantly, at least £61,250 of my £100,000 investment is going to come to me or my estate. AFPS05 has such a Guaranteed Period – not quite as generous, but a guarantee nonetheless.
If you do not Inverse Commute (ie: trade some of your lump sum for an increased pension), then your pension is guaranteed to be paid for at least two years from the commencement of payment of your pension. If you do Inverse Commute some, or all, of that lump sum, then the Guaranteed Period will be improved from two years to a maximum of five years.
Let us assume you have an annual pension of £15,000 and you have not inverse commuted any of your lump sum and you die eight months after your pension comes into payment. You will have been paid £10,000 of the guaranteed two years’ pension (£15,000 x 2 = £30,000), which means the remaining £20,000 is paid into your estate as a tax free lump sum.
Terminal Illness
The second benefit comes into play for those who leave before age 55 with preserved pensions and lump sums who, before age 65, are diagnosed with a terminal illness with a life expectancy of 12 months or less. If you should find yourself in this position then
AFPS 05 Pension Scheme by David Marsh of the Armed Forces Pension Society
contact SPVA and
let them know of the circumstances. Once SPVA are satisfied with the diagnosis they will immediately pay you the lump sum that was due to you at age 65, plus the equivalent of 2 years annual pension payments, tax free. It is a form of critical illness cover.
Early Access Finally, those on the AFPS05 scheme who leave with preserved pensions and lump sums that are normally payable at age 65 are able to access those benefits as early as age 55 if they wish. However, this does come at a price and for each year you draw those benefits before reaching 65 the value of those benefits will be actuarially reduced. The pension reduction will be around 5% per year and the lump sum reduction around 3% per year. For example, if somebody elects to have their preserved benefits put into payment from their 60th birthday, they would see the value of the pension reduce by 25% and the lump sum by 15%.
The good news for those who are on the Early Departure Payments (EDP) system and in receipt of an income stream at that point, is that even though your pension is coming into payment early, the EDP income stream continues to be paid at the same time until your 65th birthday. I point this out because many people mistakenly believe that EDP will stop the moment the pension is drawn, even when taken earlier than planned.
This means that, for example, if at age 60 you take your terminal benefits early and are already in receipt of an EDP Income Stream, for 5 years you will receive 75% of the original pension award in the form of an EDP Income Stream, plus your pension (reduced to 75% of the original award), which amounts to 150% of the original pension award. However, be aware that once age 65 is reached the EDP Income Stream ceases and the reduced pension remains reduced until you die.
If you have any questions about your military pension, you can get immediate expert advice on the phone from the Forces Pension Society if you are a member. If not, joining is easy and inexpensive. Call 020 7820 9988 or visit
www.ForcesPensionSociety.org
www.raf-ff.org.uk Envoy Spring 2012 29
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