In the first of our ‘Effects of Inflation on Your Pension’ series we reassure you that, once you have left the Service, your Armed Forces pension is index linked.
The Consumer Price Index (CPI) rise for April 2023 was announced as being a huge 10.1% so now seems a good time for us to remind you why CPI matters to you.
The rate used for increasing pensions is the CPI headline rate for the September prior to the adjustment the following April, and that headline rate is formally confirmed in October each year. CPI increases come into force on the first Monday after the beginning of the new tax year – so, the date for the 2023 increase will be 10 April 2023.
So, why does this matter?
- First, the AFPS 05 pension award is calculated using the best consecutive 365 days’ pay in the last three years, with the two earliest years increased by CPI. This helps protect the member when inflation is high and pay awards are low.
- Next, the AFPS 05 Early Departure Payment (EDP) scheme uses the same calculation of pay as used for the pension, so the CPI rate is important.
- Thirdly, AFPS 15 Added Pension which has already been purchased increases by CPI each year.
- Finally, CPI increases build up from the time you leave the Armed Forces and this applies whether your pension is paid immediately or preserved/deferred until you are old enough to draw it.
These CPI increases are referred to as Pension Increases (PIs). 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 and the earlier you leave in the period 1 April – 31 March the more of the increase you will receive in the following April. The full increase is paid in subsequent years. Remember, if CPI is high in the year you retire , the date you leave can have an impact on the size of your pension.
If you are leaving with an AFPS 75 Immediate Pension (IP) and are not yet aged 55, the PIs are stored for you and become payable at age 55. When the PI is applied (and it happens automatically), it will be based upon your original pension award, not any reduced amount you might be receiving due to Resettlement Commutation.
If you are leaving with a preserved/deferred pension, all the PIs that have occurred since your discharge will be added prior to the pension coming into payment. Once your pension is in payment, PIs will be applied each April thereafter.
PIs are applied early in only three circumstances:
- If the pension is an invaliding pension.
- If a preserved pension is paid early because you are unable to work full-time due to a mental or physical disability which is deemed will continue until your preserved/deferred pension age.
- If you die, PIs are applied to your family’s benefits, irrespective of your age or theirs.
Tax implication. The PI is subject to tax at your marginal rate.
You can read the second in this series here – How does my pension grow during Service
