Tuesday 1st September 2020
It’s been a while since we highlighted how easy AFPS 15 makes it for you to improve your pension by purchasing Added Pension and, as you are never too young to save for retirement and it is hard to imagine having too much pension, it is worth raising the issue again.
In this article Mary Petley of the Forces Pension Society sets out basics about the Added Pension provision under AFPS15 and how to get a quote.
Surely that will tie me in to extra payments for years?
No. Unlike the AFPS 75 or AFPS 05 Added Years contracts which committed members for the duration of their service, each AFPS 15 Added Pension contract lasts up to a year. Contributions can be as little as a £300 lump sum or £25 per month if you prefer to pay by instalments throughout the year. You decide what you can afford – and remember, because it comes out of pay before tax, it reduces your tax liability.
What does it enhance?
That is up to you. Contributions can either boost just the member’s pension or those of their dependants’ too. Obviously, if it is to boost the member’s pension AND those of his or her dependants, the cost will be greater as more is being enhanced.
Is there a limit?
Yes. £6,500 is the total overall amount of Added Pension that may be purchased. However, that would cost between £80K and £120K!
’between £80K and £120K’ sounds a bit imprecise. Why so?
What a contribution will buy depends upon many factors, not only what is to be enhanced. Other things that can make a difference to the cost are the member’s age when the contribution is made, his or her State Pension Age and whether the contribution is by lump sum or by monthly instalments. It also makes a difference whether you enter into the contract at the beginning of the contract year or part way through. The last time I looked at the Added Pension cost factors, there were over a dozen assumption tables!
Give me an example that will make sense to me.
A member takes out the Added Pension contract at age 38 to purchase £100 Added Pension per year.
If member’s benefits only are enhanced the cost would be £1,566 as a lump sum or £133 per month for 12 months.
If member’s and the dependants’ benefits were enhanced the cost would be £1,687 as a lump sum or £144 per month for 12 months.
This may look like a lot of money but, remember, premiums come from pay before tax, thus reducing the member’s tax liability.
What are the benefits of Added Pension?
- Added Pension offers value for money.
- The commitment is short term – each contract lasts only a year. What may be affordable one year may be unaffordable the next. The fact that the contract lasts only a year gives you the flexibility to respond to all your other commitments.
- Purchasing Added Pension is tax efficient as contributions comes from pay before tax, thus reducing the member’s tax liability.
- Increasing the pension will improve Early Departure Payment (EDP) benefits. This is because the EDP lump sum is worth 2.25 times the deferred pension and the EDP income is at least 34% of the deferred pension – and the deferred pension includes the Added Pension element.
- Even someone approaching retirement can enter into an Added Year contract.
- The Added Pension element increases each year by Consumer Prices Index in the same way as the pension.
And the drawbacks?
- You cannot take the money out of the scheme as a cash lump sum.
- If a pension increases too much in one-year HMRC’s Annual Allowance could be breached. Breaching the Annual Allowance results in an in-year tax bill.
- You must weigh the cost against your other financial commitments.
So why have you waited so long to remind us about Added Pension?
Some of you may have been transferred to AFPS 15 from AFPS 75/05 under provisions which have since been ruled as discriminatory. We have now seen the consultation document on the remedy proposed to address the discrimination (see the Forces Pension Society website) and it contains plans to ensure that those who purchased Added Pension under AFPS 15 rules and then transfer back to AFPS 75/05 would have the value credited to those benefits. That gave us the confidence to write this article.
How do I apply?
Submit an AFPS Form 6 to Defence Business Services (Glasgow) to obtain a quote. Getting a quote does not commit you to entering into an Added Pension contract – it is only if you like what you see and apply on an AFPS Form 6A that you enter into the contract. These forms are available on JPA or on the GOV.UK website.
If you are a Member of the Forces Pension Society and have questions on this or any other pension related matter, email [email protected]. If you are not a Member but would like to know more about us, visit Forces Pension Society website.