It is never too early to save extra for retirement, and AFPS15 makes it easy for you to improve your pension by purchasing Added Pension. So each day this week we give you answers to some common questions about the Added Pension provision under AFPS15.
Today we talk about the pros and cons...
Q. What are the pros?
- 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.
- Members do not have to have the expectation of service to the scheme’s Normal Pension Age (or to any other specific point of service) to enter into an Added Year contract.
- The Added Pension element increases each year by the Consumer Price Index.
Q. And the cons?
- 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.
Check back tomorrow for the next question in this Q&A series