We cannot remember anybody complaining about having too much money in retirement and AFPS15 makes it easy for you to improve your pension by purchasing Added Pension. You are never too young to save for retirement and in this article we set out basics about the Added Pension provision under AFPS15 and how to get a quote.
Surely that will tie us in to extra payments years?
No. Unlike the AFPS 75 or AFPS 05 Added Years contracts which committed members for the duration of their service, each AFPS 15 Added Pension contract lasts up to a year. Contributions can be as little as a £300 lump sum or £25 per month if you prefer to pay by instalments throughout the year. You decide what you can afford – and remember, because it comes out of pay before tax, it reduces the member’s tax liability.
What does it enhance?
That is up to the member. Contributions can either boost just the member’s pension or those of his or her dependants’ too. Obviously, if it is to boost the member’s pension AND those of his or her dependants, the cost will be greater as more is being enhanced.
Is there a limit?
Yes. £6,500 is the total overall amount of Added Pension that may be purchased. However, that would cost between £80K and £120K!
“between £80K and £120K “ sounds a bit imprecise. Why so?
What a contribution will buy depends upon many factors, not only what is to be enhanced. For example, other things that can make a difference to the cost are the member’s age when the contribution is made and whether the contribution is by lump sum or by monthly instalments . It also makes a difference whether you enter into the contract at the beginning of the contract year or part way through. The last time I looked at the Added Pension cost factors, there were over a dozen assumption tables!
Give me an example that will make sense to me.
A member joins the Armed Forces at age 20 and takes out the Added Pension contract at age 38.
If he or she enhances the member’s benefits only the cost would be £1,389 as a lump sum or £117 per month for 12 months.
If the member’s and the dependants’ benefits were enhanced the cost would be £1,481 as a lump sum or £126 per month for 12 months.
This may look like lot of money but, remember, premiums come from pay before tax, thus reducing the member’s tax liability.
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.
- Even someone approaching retirement can enter into an Added Year contract.
- The Added Pension element increases each year by Consumer Prices Index in the same way as the pension.
And the cons?
- You cannot take the money out of the scheme as a cash lump sum.
- If a pension increases toomuch 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.
How do I apply?
Submit an AFPS Form 6 to Defence Business Services (Glasgow) to obtain a quote. Getting a quote does not commitment you entering into an Added Pension contract – it is only if you like what you see and apply on an AFPS Form 6A that you enter into the contract. These forms are available on JPA or on the internet at https://www.gov.uk/government/publications/service-personnel-and-veterans-agency-spva-pensions-forms.