In this instalment of Stowe guests, we are joined by Josh Richardson, a Chartered Financial Planner from Informed Financial Planning.
Informed Financial Planning is focused on helping their customers make the most of their money today, tomorrow and the future including pensions.
Today, Josh offers his expert advice on how divorce can potentially impact on armed forces pensions.
Public sector Defined Benefit (DB) schemes are complex and seemingly ever-changing beasts. These schemes form an essential, valuable asset for many individuals and they will provide an important element of income security for members in retirement. From the NHS Pension to the Local Government Pension Scheme rule changes have been common across the past four decades or more with each change being an elaborate cost reducing and financial stability providing exercise. As a direct result of this however, an entangled web of differing retirement ages, definitions of pensionable salary and accumulation rates has formed across schemes.
It is not surprising therefore, that members rarely comprehend how their pension schemes operate or how their benefits build up. More importantly, dissolution of a marriage or civil partnership often raises significant questions regarding how individuals’ pension benefits will be impacted. In this series of blog entries we aim to provide an overview of the main public sector DB schemes including the pension schemes for the Armed Forces, NHS and Teachers and the changes members may see if a divorce occurs.
These articles will provide a summary of the main rules applicable to the larger schemes but they will not necessarily cover individual circumstances. It is recommended that members speak to their respective scheme administrators, or an independent financial adviser, to identify which rules apply to their pension benefits.
The Armed Forces Pension Scheme
The Armed Forces Pension Scheme (AFPS) represents one of the more complex DB schemes in the public sector. It is made up of three separate rule books, with one or more of these being applied to members’ schemes depending on when they joined. In addition further benefits for members who leave after set periods of service and funds to help service members re-adjust into civilian life, are available and sit alongside individuals’ pensions.
Depending on the date on which an individual commenced their service, their benefits will be governed within one or more of the following sections of the AFPS:
- Armed Forces Pension Scheme 1975;
- Armed Forces Pension Scheme ’05; or
- The Armed Forces Pension Scheme 2015.
Each of these follow different rules, which are summarised in the following sections. As written above, you should check with Veterans UK, who administer these schemes, to identify which rules apply to your membership.
Armed Forces Pension Scheme 1975 (AFPS 75)
Please note, only a minority of Armed Forces employees remain in this section. Most are members of AFPS ’05 or the AFPS 2015.
Full Career Maximum Pension
AFPS 75 provides members with a full career maximum pension, based on their final salary, at the age of 55 if members retire with:
- 34 years of service from age 21 (for Officers); or
- 37 years of service from age 18 (for other ranks)
The income received will increase each year in line with inflation. A tax free lump sum, of three times the member’s pension, will also be paid.
Members of the AFPS 75 are permitted to leave the Armed Forces before age 55. If chosen, an immediate pension will be paid based on their service plus a tax free lump sum. This is providing the member has completed at least:
- 16 years of qualifying service from age 21 (Officers); or
- 22 years of qualifying service from age 18 (other ranks)
The pension received will remain the same each year until the member gets to age 55 at which point they will receive the increases they have missed out on plus annual inflationary increases going forward. This is similar to the early departure payments discussed later.
If members do not qualify for an Immediate Pension, they may be entitled to a deferred pension. For pension benefits built up before 6th April 2006, members can receive their pension at age 60. Pension benefits built up after this date will be paid at age 65. This may lead to individuals receiving part of their income, which then increases after 5 years’ time. Members can request their benefits, which are payable at age 65, are paid early but an ‘early retirement’ reduction will apply.
Armed Forces Pension Scheme ’05 (AFPS 05)
You will be a member of the APFS 05 if you commenced employment with the Armed Forces between 6th April 2005 and 1st April 2015.
Within this scheme you will be entitled to a guaranteed pension from age 65. The pension you receive is based on your ‘final salary’ and the years you have worked for the Armed Forces. For each year you work you will earn 1/70th of your final pensionable earnings. For example:
If your final salary is £30,000 after completing 25 years’ service your annual pension would be calculated as follows:
£30,000 x 25 x 1/70 = £10,714 per year of pension
In addition members will receive a tax free lump sum equivalent to three times their pension. In the above example this would equate to £32,142.
Members can request to take their pension early, before age 65, however there will be a reduction to the income they receive. This reduction reflects the fact that a member’s pension would be paid for longer than normally expected.
Early Departure Payments
To reflect the fact that members in the AFPS cannot receive pension benefits when they retire before 65, as they could in the AFPS 75, they are entitled to an Early Departure Payment (EDP).
To be entitled to this members must be aged between 40 and 55 and have served for a minimum of 18 years. A tax free lump sum equivalent to three times the member’s preserved pension and a taxable income worth not less than 50% of their annual preserved pension will be payable.
This pension will then increase to 75% of the preserved pension once the member reaches age 55 and will also be increased to take into account of inflationary rises from the date the EDP commenced.
Once the member reaches age 65, the EDP will cease and will be replaced by their full pension from the AFPS 05. This income will increase each year in line with inflation.
The Armed Forces Pension 2015 (AFPS 15)
For those in employment after 1st April 2015, members will hold benefits in AFPS 15. Whilst this remains a guaranteed Defined Benefit scheme, benefits are accrued under a different system, called Career Average Revalued Earnings (CARE).
Pension – Income
Each year the scheme adds an amount equal to 1/47th of your annual pensionable salary, to each member’s ‘pension pot’. This pot starts to accumulate from the member’s first day of paid service and is carried forward into each year where it grows slightly to ensure that it tracks inflation and maintains its value.
After two years’ service members will be entitled to a deferred pension. This pension will increase annually in line with the Consumer Price Index (CPI) and will be paid when the member reaches their State Pension age.
If however, the member works up until age 60 they will be able to claim their pension immediately.
Pension – Lump Sum
Under AFPS 15 members are not automatically entitled to a tax free lump sum.
In order to receive a lump sum members will need to create a lump sum by ‘surrendering’ part of their annual pension through a process called ‘commutation’. The commutation rate is fixed; for every £1 of pension income a member gives up, a lump sum of £12 will be provided.
A member is entitled to a pension of £10,000 per annum. They have the option to surrender some of this income for a lump sum.
If the member wishes to receive a £10,000 lump sum, they would have to surrender £833.33 per annum. This would reduce their annual income payments to £9,166.67.
Early Departure Payments
AFPS 15 also provides for Early Departure Payments (EDP). Under AFPS 15 however, members must serve for a minimum of 20 years and be aged between 40 and 60. Under an EDP members will receive a lump sum of 2.25 times their deferred pension plus a monthly income of 34% of their annual deferred pension.
Once members reach age 55, their monthly payments will increase in line with CPI. The CPI increases will also be backdated to when the member left the Armed Forces. At State Pension age the member’s pension will increase to the full deferred pension they are entitled to.
Source: The Armed Forces Pension Scheme 2015, Your Pension Scheme Explained
When it comes to your AFPS the courts have a number of options, including the following:
- Making no order, deeming you and your spouse to be equal in your financial provision;
- Allowing you to use offsetting, whereby you utilise other assets or property to ‘buy out’ your spouse from your AFPS benefits;
- Granting an Attachment Order, whereby your spouse would receive payments from the AFPS, as a lump sum or income, when you receive your pension; or
- Granting a Pension Sharing Order, whereby a share of your pension passes to your spouse and they become a member of the AFPS in their own right.
All of the above, except for an attachment order, would provide for a ‘clean break’ from your spouse, which is usually preferred.
Starting on Page 5 of the ‘AFP Guide on Divorce and Dissolution of Civil Partnerships’, frequently asked questions are answered regarding the benefits of each order.
One of the most important aspects to note on this guide is in relation to Early Departure Payments. These do not count as ‘pension income’ prior to members being entitled to their full pension. In light of this, these will not be included in any pension sharing or attachment orders. Please note, this is not the case for the Immediate Pension, which is payable under AFPS ’75.
Get in touch
To get in touch with Informed Financial planning, you can visit their website here
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