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What is ‘Actuarial Reduction’?

Most of you will leave the Armed Forces before the pension age for your scheme and you will have to wait to claim your pension(s).  You can, however, claim them early on ill-health grounds or, if having reached a certain age, you agree to receive them at a reduced rate.  In this article we explain the latter – our follow-up article covers the former.

If you leave, other than with an ill-health pension, before the pension age for  your pension scheme, your pension will be preserved (AFPS 75, AFPS 05 and RFPS) or deferred (AFPS 15) until you reach a certain age.  The preserved/deferred pension ages are:

AFPS 75: age 60 for pension earned before 6 April 2006 and age 65 for the balance;

AFPS 05 and RFPS: age 65; and

AFPS 15; your State Pension Age (SPA).

These are the ‘normal’ preserved/deferred pension ages but what is the earliest you can claim your Armed Forces pension (other than on ill-health grounds) and what are the consequences of doing so?

For AFPS 75, you can claim the part of the pension payable at age 65 from age 60.  For the other schemes you can claim from age 55.  For all schemes the claim is made using an AFPS Form 8.  That sounds good….but there is a cost.  The pension will be reduced to take account of the fact that it will be in payment for longer than it would have been had it been claimed at the ‘normal’ age.  This adjustment to the pension is called ‘actuarial reduction’. The amount of the reduction is calculated using factors which take account of the member’s age when claiming and the ‘normal’ age at which the benefits would otherwise be paid.  Let’s give you a few examples using the current factors.

A veteran has an AFPS 75 preserved pension of £10,000 and a lump sum of £30,000.  £8,000 (plus a £24,000 lump sum) is payable at age 60 and £2,000 (plus a £6,000 lump sum) at age 65.  If they claimed the part payable at age 65 at age 60, the £2,000 pension would reduce to £1,517 and the £6,000 lump sum would reduce to £5,328.  This would result in a payment at age  60 of £9,517 pension (£8,000+£1,517) and a lump sum of £29,328 (£24,000+£5,328).

An AFPS 05/RFPS member has a preserved pension of £10,000 and a lump sum of £30,000 normally payable at age 65.  If they claimed at age 55 the pension would reduce to £5,986 and the lump sum would reduce to £23,670.

An AFPS 15 member has a deferred pension of £15,000 normally payable at age 68 (their SPA).  If they claimed at age 55 the pension would reduce to £7,448.51.  There is no automatic lump sum to consider but they could surrender some of this reduced pension to generate on – the rule of thumb is that £1 surrendered generates a £12 lump sum.

Written for the June 22 issue of Pathfinder

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