As a transferee, you can’t now do anything to improve your benefits in your ‘old’ scheme (AFPS 75 or AFPS 05) but, even with only a short period left to serve, you can improve your AFPS 15 pension should you so wish. In this short article, we explain the potential advantages of improving your AFPS 15 pension and the process for doing so.
AFPS 15 offers members the opportunity to purchase Added Pension. Contracts are for one year only which means that members can buy Added Pension in years when they feel they can afford it and even someone approaching retirement can participate. The scheme year runs from 1 April to 31 March and only one Added Pension contact may be entered into in any scheme year.
There are two types of contract: the first boosts just the member’s pension and the second boosts both the member’s pension and his or her dependants’ benefits. Members can take out a new contract every year should they so wish, in the sum they choose to contribute, deciding each time whether the improvement is just for themselves or to include dependants. The rules do not include a ‘dependants only’ option.
Currently, the maximum amount of extra annual pension that someone can purchase is £6,500 but this would cost up to £200,000 depending upon the member’s circumstances. £6,500 is the overall maximum by which you can improve your pension by NOT the maximum you can pay in to an Added Pension contract in any one year. The minimum amount you can pay towards Added Pension is £300 per year as a lump sum or £25 per month. As a rule of thumb, about £1,000 paid at the age of 30 buys an extra £100 of annual pension for the member.
Exactly what any given sum will buy is arrived at by employing factors which are produced by the Scheme Actuary. The factors cater for many variables including:
- your age when you start to pay for Added Pension,
- whether you pay monthly or by lump sum,
- whether you take out the contract at the beginning of the contractual year or part way through, and
- whether you buy Added Pension just for yourself or yourself and your dependants.
Your gender makes no difference in terms of the factors and the amount you pay.
To obtain a quote, simply submit an AFPS Form 6 . It is not until you accept the quote in writing on an AFPS Form 6A that the contract begins. Once you have entered into the contract, if you need for some reason to stop paying the instalments, you do so by submitting a further AFPS Form 6A which cancels all previous instructions. If you do stop paying, the improvement to your pension will reflect only what you have actually paid for, rather than the amount specified in the original Added Pension contract. Further, you will not be able to enter into a new contract until on or after 1 April of the next scheme year.
Once Added Pension has been purchased, it increases each year by Consumer Prices Index until it is paid out. It is paid out at the same time as the pension becomes payable.
Obviously, with every financial arrangement you enter into, there are pros and cons. The pros are:
- Purchasing Added Pension is cost effective. You get value for money;
- Purchasing Added Pension is tax efficient as the money you pay into the scheme to improve your pension comes from you pay before tax. For many of you, it will reduce your 40% tax liability; and
- The increase in pension will feed through to Early Departure Payment (EDP) lump sum and income stream. So, if you buy £100 Added Pension your EDP lump sum (which is tax-free) is £225 more than it would otherwise have been!
The cons are:
- AFPS 15 is less flexible than many civilian pension schemes in respect of how you take your pension. For example, you cannot take your pension pot in cash; and
- You need to be careful not to breach the Annual Allowance (AA). The AA, which is set by HMRC, is currently £40,000 which means that, if you pension increases by more than about £2,250 per year, you could be liable for a tax charge.
This article was written by Mary Petley for the Summer 2019 issue of Easy Resettlement