In this month's pension column written for Pathfinder Magazine we highlight the topic of transferring pensions out of AFPS and the options available.
Many of you will be leaving service with a preserved or deferred pension. That means that you haven’t served for long enough to qualify for an immediate pension, so will have to wait until 60, 65 or your state pension age (SPA) to draw it, depending upon which AFPS your benefits are in. Most of you will leave those preserved or deferred benefits in MOD’s safe hands but some of you will be wondering whether or not to move them. This article takes a look at the transfer rules, together with the AFPS rules allowing preserved or deferred benefits to be claimed early.
Looking at the latter first. The ages at which AFPS preserved and deferred benefits are payable are:
- For AFPS 75 preserved pensions are payable at age 60 for the proportion of the pension earned up to and including 5 April 2006 and age 65 for pension earned after that date.
- For AFPS 05, the preserved pension age is 65.
- For AFPS 15 deferred benefits are payable at the SPA of the member.
Veterans often ask for these benefits to be ‘cashed in’ instead of paid as an annual pension. They recall that some years ago the Chancellor relaxed the pension rules to allow certain pension savings to be taken as cash rather than an annuity for those retiring after 6 April 2015. We're afraid we have to disappoint them as unfunded public sector pension schemes are not amongst the pension arrangements to which this relaxation applies.
Each AFPS does, however, allow preserved/deferred pensions to be drawn early with actuarial reductions – that means they are reduced to take account of the fact that they are in payment for longer than would otherwise be the case. For AFPS 75, the part of the pension payable at age 65 may be drawn at 60. For AFPS 05 and AFPS 15, the whole preserved/deferred pension may be drawnfrom age 55. To give you an idea of how costly it can be to take preserved benefits early, an AFPS 05 member taking their preserved pension at age 55 instead of 65 can expect to lose 40.14% of their pension and 21.1% of their lump sum due to actuarial reductions. You will see from this example why we strongly advise that anyone considering taking their preserved/deferred benefits early with actuarial reductions should seek financial advice before acting.
Turning now to transfers. The rules, in a nutshell, are;
- Only a deferred/preserved pension may be transferred. Once your Armed Forces pension is in payment, it may not be transferred;
- Armed Forces pensions may not be transferred to an overseas scheme, a Defined Contribution scheme or a private pension scheme. It is possible to transfer them to other Defined Benefit (DB) schemes, including other public sector schemes.
- Transfers to other public sector schemes must be done within 12 months of being eligible to join the new scheme - the clock starts ticking as soon as you are eligible to become a member of the new scheme irrespective of whether you are in fact a member. Other DB schemes may also have time limitations for transfers, so do check.
The transfer process is straightforward:
- Find out what you have built up in the scheme. Applications for a ‘statement of entitlement must be made in writing to Veterans UK.
- Ask your new scheme what the value of your AFPS benefits will buy in their scheme. You are not committed to the transfer at this stage of the process and, if you are unhappy with what the new scheme is offering or simply decide not to put all your eggs in one basket, it is still open to you to leave your benefits in AFPS.
- If you decide to go ahead, apply to Veterans UK for a transfer value payment, specifying the scheme to which the transfer value should be made. Once the transfer agreement has been entered into with the new pension scheme, you cannot change your mind.
- Once you have transferred out, you will have no rights or benefits remaining in AFPS.
In reaching your transfer decision one of the things you should consider is the age at which benefits are payable in your new scheme – there are others but this example is just to get you thinking. Most public sector schemes will feature a Normal Pension Age (NPA) and deferred pension age of whatever the member’s SPA is – the exceptions are the Police and Fire Brigade scheme which, like AFPS 15, have an NPA of 60 and a deferred pension age of the member’s SPA. That means that if an AFPS 75 member transferred his or her AFPS benefits into such a scheme they could have to wait seven years longer to receive a chunk of their hard earned pension and up to two years extra for the balance which would have been due from AFPS 75
The following example, which ignores inflation increases, will demonstrate the importance of considering when benefits are payable in both new and old scheme:
A nurse leaves the Armed Forces in April 2020 with exactly 18 years service. She has a preserved AFPS pension of £7,224.75 and a preserved lump sum of £21,674.25. If her preserved pension remains in AFPS 75, she would receive a lump sum of £6.669 and an annual pension of £2,223 at age 60. At age 65 she would receive a lump sum of £15,005.25 and her pension would increase by £5,001.75 to a total of £7,224.75. Any AFPS 15 benefits would be payable at her SPA.
If she transferred these benefits to the NHS pension scheme, she would normally have to wait until her SPA to draw them - although she could opt for early payment with actuarial reductions, but we have already established that is expensive.
Assuming her SPA is 67 she could have already received the following from AFPS 75 by the time here NHS pension is payable:
- £6,669 tax-free lump sum at age 60;
- £11,115 in pension between age 60 and 65 (£2,223 x 5);
- £15,005.25 tax-free lump sum at age 65; and
- £14,449.50 in pension between age 65 and 67 (£7,224.75 x 2).
That is a total of £67,238.75 before her SPA, had she not transferred out of AFPS 75 and into the NHS scheme.
We are not saying that it is always wrong to transfer out of an AFPS. For example, most schemes have a two year qualifying period which must be served before the scheme will pay out ill-health or family benefits and transferring benefits in from another scheme could mean automatic qualification. What we are saying is that you should take financial advice so that you understand all the implications of transferring from one scheme to another.
Finally, a little good news for those of you who will have deferred AFPS 15 benefits who plan to take up public sector employment within 5 years of leaving the Armed Forces. You will qualify for benefits in your new scheme automatically by virtue of the continuity rule and you do so without transferring any benefits from an AFPS.
If you are a member of the Forces Pension Society and have questions on this or any other pension-related issue email us at email@example.com .
If you are not yet a member but would like to know more about us, click here
Author: Mary Petley for August issue of Pathfinder
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