By Dave Scholey, Regional Manager South East & East
Public Sector pensions generally have a reputation for being good occupational pension schemes. The Armed Forces schemes in particular, benefit from being non-contributory. This means the employee does not have to make mandatory contributions into the scheme. Other schemes in the public sector require members to make contributions of between 5 and 12% depending on which government department owns the scheme. The minimum employee contribution in private sector schemes is 5%. Members of all active occupational schemes can usually make additional voluntary contributions to top up their pension. As the only active Armed Forces pension scheme, AFPS15 also allows members to make these voluntary additional pension contributions if they wish.
AFPS15 allows members to make contributions in one of two ways, a straight choice between a one off lump sum or by deduction from earnings monthly. This is done by an annual contract. A member is allowed to start a new contract each year if they wish.
The benefits a member can purchase can be solely for their own pension or for their own and also their dependants’ benefits. The scheme member must stipulate at start of contract which benefits they are purchasing.
To find out how much added pension your contributions will purchase, you can obtain a quote from Veterans UK. Form6 is used to request this. The amount quoted is the addition which will be added on to the pension that you may have already purchased and accrued under the AFPS15 scheme. If you like the look of the offer, you simply request them to put the contact into place by using Form6a
We were recently asked by a 28 year old service person for a view on a quote they had received from Veterans UK. The requested quote was for how much a lump sum of £6,500 might buy in additional annual pension in AFPS15. The answer they received was £733.58 per annum. We asked a member of our panel of professional advisors what he thought of the offer. Barry Pearce, an IFA and Later Life Financial Planner at BrightonWilliams said:
“So, to try to compare we could look at a calculation based on a single premium of £8,125 into a Personal Pension plan which after tax relief reduces to £6,500 and looked at a period to Age 68. As we are now looking at an investment product this would produce a higher fund than produced at Age 60 and the annuity/income rates will be better. So, if we take the Mid-Range level of growth that is shown on the projection I received, which would seem a fair approach, it would produce a pension fund of £12,900. The annuity or guaranteed income would be £392 p.a. indexed linked without any dependent’s benefits. If we looked at the higher growth rate that is shown on the projection, then the annuity is £1,390 p.a. However, remember with all of these “projections” they are all still based on investment performance and there is no guarantee on the final sum that would be used to purchase the income. We have no way of knowing what annuity rates will be in the future, but they have been steadily reducing as we all live longer. I am pretty sure that they will not be improving. With Added Pension the person in question would be buying an income based on service and income with this figure being increased by CPI until it is in payment. I think this shows what a good option Added Pension can be. Buying Added Pension is buying a certainty not a promise, and I think that is the real reason I think, in many cases it should be the preferred method of improving a pension. “
There is a cap on how much you can cumulatively increase your overall AFPS15 pension by. That cap is currently set at £6,500 but may be increased by the scheme administrator at any time.
A nice bonus about Added Pension for those who leave on EDP (Early Departure Payments) terms is that EDP Income, paid until State Pension Age (SPA) is calculated as a percentage of the deferred pension and EDP Lump Sum, paid at the time of leaving the services is 2.25 times the value of the deferred pension, so increasing the deferred pension has the knock on effect of increasing both parts of EDP. To be eligible for EDP Terms the individual must serve at least 20 years and be at least 40 but under 60 on their first day back in civvy street. This is known as the 20/40 Point.
For more about Added Pension to AFPS15, see Chapter 7 of JSP 905 AFPS15 Part 1