You are often told that you have an ‘index-linked’ pension and, in this short article written for the winter issue of Easy Resettlement Magazine we explain what that means.
Armed Forces pensions, once awarded, are adjusted in April each year by the Consumer Price Index (CPI), the UK’s official measure of inflation, set by the Bank of England’s Monetary Policy Committee. The CPI rate used is the CPI headline rate for the September prior to the April adjustment the following year. This rate is formally announced in October each year, and this October it was announced that the April 2020 adjustment will be 1.7%. It is these annual CPI increases that constitute index-linking – your scheme refers to them as Pension Increases (PIs).
This increase comes into force not on 1 April each year but on the first Monday after the beginning of the new tax year. So, for April 2020, the increase comes into force on 13th April.
The first PI is paid on a sliding scale depending upon when in the year you leave. The year runs from 1 April – 31 March each year and the earlier you leave in the period 1 April – 31 March the more of the increase you will receive in the following April. Put very simply, those leaving in the first few weeks of April will get the full PI the following April, those leaving in October will receive about half of the PI the following April and those who leave in the last couple of weeks of March will get no increase in the following April. The full increase is paid in subsequent years. This applies whether the pension is to be paid immediately or not. The proportion of the first increase you receive can make a big difference to your cumulative pension income if CPI is high in the year you retire and, whilst most of you cannot do anything about your discharge date, for those of you who can, it is worth remembering that the date you leave matters.
If you are leaving with an AFPS 75 Immediate Pension (IP) or AFPS 05/15 Early Departure Payment (EDP) benefits, and are not yet aged 55, the PIs are stored for you and become payable at age 55. You do not have to apply for this to happen but Veterans UK may write to IP recipients to ask what other occupational pensions have been earned or might be in payment. They do this to check whether the HMRC Life Time Allowance will be breached (which, for the majority of us, it will not). Once satisfied, they will apply the PIs for the period since you left the Armed Forces. For those of you who will be receiving EDP benefits a gentle reminder – even though your EDP benefits are in payment, you will need to claim your pension when the time come. That will NOT happen automatically!
If you leave with an IP and then take up an FTRS post, your pension will be subject to abatement. If you are still in the FTRS when you reach age 55, any abatement continues but you are entitled to receive the PIs which have built up since you left the Regulars and the PI in each April thereafter.
If you are leaving with a preserved/deferred pension, PIs will be added prior to the pension coming into payment to take account of all the PIs that have occurred since you left. Once your pension is in payment, PIs will be applied each April.
PIs are applied early in only three circumstances:
- If you are discharged with an invaliding pension, PI are payable from the outset. This means there is no big increase at age 55 because, unlike those who left with an IP, you will have been receiving PIs from the outset.
- If you are unable to work full time due to mental or physical disability which is deemed to continue until your preserved/deferred pension age you can claim your pension early, with PIs added. If you are in receipt of an IP but not yet 55 you can apply for PIs to be paid early if you are unable to work full time due to permanent ill health. Applications are made on an AFPS Form 8.
- If you die, PIs are applied to your family’s benefits, irrespective of your age or theirs.
If you are a member of the Forces Pension Society and would like to know more about PIs or any other pension issue, email us on firstname.lastname@example.org. If you would like to learn more about us click here
To read Easy Resettlement click the image