This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, it is subject to change and we are not responsible for any errors or omissions.
Pensions can be complex for those in the armed forces. With regular postings overseas, British Army personnel are subject to special rules which differ from those typically applied to British expats (and other non-UK residents).
Our financial advisers offer a short guide to the armed forces pension scheme in 2024, how pension benefits work and how the rules can affect an individual’s wider retirement plan. Our financial planners focus these comments on nearby armed forces readers (e.g., in Gibraltar). Yet many of these insights apply to armed forces personnel posted elsewhere in the world.
We hope these insights are useful. If you want to discuss your financial plan with a member of our team, please get in touch to arrange a no-obligation financial consultation, at our expense:
+34 966 460 407
info@scottsdale.eu
Overview of armed forces pensions
When someone joins the British Army, they are automatically enrolled in an armed forces pension scheme. Unlike other public sector pensions, you do not contribute to it out of your salary each month. Rather, it is entirely publicly funded.
Armed forces pensions are widely considered some of the most generous in the UK. For instance, in 2024-25, the maximum available retirement income from the AFPS 05 armed forces pension is up to 57% of your final pensionable pay.
All armed forces pension schemes are classed as “defined benefit schemes” (or “final salary schemes”). These offer a guaranteed income in retirement to former armed forces personnel.
These pensions differ from the prevailing type of UK private sector pension, known as defined contribution schemes. These build up a “pot” of money over time, often combining employee and employer contributions.
Types of armed forces pension
The British Army has offered many pension schemes over the past decades. However, if you are currently serving, there are four main types to be aware of:
- AFPS 75 (Regulars only – entry closed on 05/04/2005)
- AFPS 05 (Regulars only – entry closed on 31/03/2015)
- RFPS 05 (Full-Time Reservists only – entry closed on 31/03/2015)
- AFPS 15 (All Regulars and Reservists)
The first (AFPS 75) is one of the UK’s “generous” defined benefit schemes. It offers up to 48.5% of your final pensionable pay, plus a tax-free lump sum of three times your annual pension.
The other three are “final salary” armed forces pension schemes. The last one (AFPS 15) is unique because it is built upon the Career Average Revalued Earnings (CARE) scheme. Here, part of your pension benefits can be given up to obtain a tax-free lump sum.
Can I cash in my army pension?
In the UK, pension benefits are typically barred from members until they reach their “Normal Minimum Pension Age”. In 2024-25, the NMPA is 55. By 2028, it is expected to rise to 57.
This rule also applies to an armed forces pension. The main exception is if you are diagnosed with a terminal illness or have a shortened life expectancy.
As mentioned, AFPS 15 lets members exchange pension benefits for a tax-free lump sum. However, this option is not automatically generated. Taking it requires making an active claim after reaching NMPA.
What if I am injured in the army?
Life in the armed forces can bring additional risks to life and physical health. If you are injured or disabled due to service, there are options to explore – such as the Armed Forces Compensation Scheme (AFCS). If an individual qualifies, there are two types of awards:
- A tax-free lump sum payment for pain and suffering
- A Guaranteed Income Payment (GIP). This is a tax-free, index-linked monthly payment.
This is separate from any personal financial protection you might take out, such as Personal Accident (PAX) or Life Insurance (LI). The AFCS does not consider these when it considers an individual’s case for award. It is available to all three armed forces, reservists and the Royal Gibraltar Regiment.
Retirement planning in the armed forces
It may disappoint some to read that an armed forces pension is not normally available to cash in before reaching NMPA. However, pensions are intended to support a future retirement lifestyle.
Most individuals likely do not join the armed forces for the pension. However, if you are currently serving, this could be a unique opportunity to lay a strong foundation for your future retirement, given the “generosity” of the “forces pension scheme 2015” (AFPS 15) and its relatives.
For instance, one option is to consider a “lifetime ISA” (LISA) Most non-UK residents cannot open and keep contributing to ISAs (receiving their tax benefits) whilst living overseas. However, this is not the case for armed forces personnel.
In 2024-25, an individual can contribute up to £4,000 per year to a LISA, and the government will “top up” the contributions by 25% (up to £1,000). If you leave the armed forces and return to the UK, the funds can be used to buy your first home.
Another option could be to open your own private pension alongside your armed forces pension. As Crown Servants, armed forces personnel can contribute to their own pensions are receive tax relief equivalent to their highest marginal rate of income tax.
Invitation
If you are interested in discussing your own financial plan or inheritance tax strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
+34 966 460 407
info@scottsdale.eu