Types of workplace pensions

The armed forces pension is part of your total reward for serving and is one of the most valuable benefits you earn in uniform. It’s designed to reflect the unique demands of service life and to provide you and your family with an income in later life or if the worst happens.​

It is what is known as a defined benefit pension. This means the pension you receive in the future is based on your service and pay, rather than the performance of investments or your chosen level of contribution.

Most civilian pensions today are defined contribution schemes, where your income depends on how your pot is invested. As we’re all living longer, you won’t normally find a defined benefit pension on offer for new schemes in the private sector.

All regulars and reservists are automatically enrolled into the Armed Forces Pension Scheme. You don’t need to opt in, and unlike most public-sector workers you do not pay monthly pension contributions from your salary.

In simple terms: you serve, you build up pension benefits – paid for by the armed forces and these are paid to you later as an income.

Across today’s armed forces there are several generations of scheme. The main ones you may hear about are AFPS 75, AFPS 05, and AFPS 15, along with some reserve-specific schemes such as RFPS 05.

Since 1 April 2022, AFPS 15 has been the pension scheme for all currently serving regulars and reservists. If you joined before 31 March 2015, you may still hold benefits in the legacy schemes, AFPS 75 or AFPS 05, from earlier service.

A minimum period of service, normally two years, is required to become entitled to pension benefits from these schemes.

How AFPS 15 works:

AFPS 15 pensions are calculated using a system called Career Average Revalued Earnings (CARE). Each scheme year, from 1 April to 31 March, a fraction of your pensionable earnings is added to your pension. For AFPS 15, this is 1/47th or about one week’s wages each year. This amount is then revalued each year to help keep pace with national earnings or prices.

If you serve to the scheme’s normal pension age of 60,  either as a regular or reservist, your pension is paid immediately at that point. If you leave before the age of 60, which most service personnel do, your earned pension is deferred, or held, until you reach State Pension age. If you’re a regular and have 20 years or more reckonable regular service, after the age of 40 you qualify for an Early Departure Payment.

Early Departure Payment, or EDP, is an additional benefit, separate from the pension. It is designed to provide income if you leave the armed forces before your pension becomes payable.

EDP is based on the value of the pension you have built up. Like the armed forces pension, it includes an annual income and a tax-free lump sum.

EDP applies to members of AFPS 05 and AFPS 15, but the qualifying service requirements differ. Under AFPS 05 you normally need at least 18 years of service, while under AFPS 15 you need 20 years of service.

In both cases you must also have reached age 40, but be under 60. EDP then provides income until your pension becomes payable later in life.

AFPS 15 also offers members the option to increase their armed forces pension through something called Added Pension.

Added Pension is an extra amount of annual pension you can buy, which will be paid to you each year when you start receiving your AFPS 15 pension. It is a way to boost your AFPS 15 income in retirement, without needing to open or manage a separate pension product.

Added Pension can increase just your own AFPS 15 annual pension, or both your own annual pension and certain dependants’ benefits, depending on the type of contract you choose.

If you are a member of AFPS 15, you can buy one Added Pension contract per scheme year, starting from your first day of paid service until you leave the armed forces. A scheme year runs from 1 April to 31 March. Once you retire, any Added Pension you have purchased is paid at the same time as your AFPS 15 pension, increasing your yearly income.

Contributions can be made either through monthly instalments or by paying a lump sum. Monthly instalments can start from as little as £25, and lump sum payments begin at a minimum of £300.

The cost of purchasing Added Pension depends on several factors, including:

• your age at the time of purchase
• whether you pay by instalments or by lump sum
• how much pension enhancement you want to buy, and
• when in the scheme year the contract starts

To understand how much Added Pension could cost – and how much additional annual income it could provide – you can use the MoD’s AFPS Added Pension Illustrator. You can also request a formal quote by using AFPS Form 6 from the gov.uk site or JPA system.

Requesting a quote for Added Pension does not commit you to buying it. You only enter into a contract if you submit an AFPS Form 6A after reviewing your quote.

For most service people, the pension will be one of the largest financial assets they ever have, often worth more over a lifetime than their house. It also provides important protection for your dependants. If you die in service or after leaving: there are provisions for spouses, partners and children that can give them an ongoing income.​

Because contributions are effectively paid by the government, armed forces pensions are generally more generous than most civilian schemes for the same level of take-home pay, which is part of the overall military reward package.

How pensions are protected and controlled depends on the type of scheme. Usually, the scheme has trustees in place to protect members’ interests – that’s you, for example by choosing good investment managers and monitoring their performance.

On retirement, you can access your pot in a number of ways. For example, you can use some or all of the money to buy an annuity. You’ll need to set this up using an insurance company. This is a guaranteed income for life, which pays a regular payment for the rest of your days.

For an annuity, you can lock in a certain fixed and stable income for your remaining life. But the rate you get will depend on factors such as interest rates at the time and your health.

The risk with an annuity is that you’re taking a bet with the insurer on how long you might live. When you die, the income usually stops.

So if you die before average life expectancy, you may not get as much back in income as you paid out to buy the annuity. But on the flip side, if you live a long time, you could be paid more in income than you paid to buy the annuity.

Alternatively, you can keep your pension money invested and take flexible income or lump sums directly as and when you need them.

Auto-enrolment legislation means most employers must automatically enrol qualifying employees into a pension scheme. However, employees can opt out.

Most auto-enrolment schemes are defined contribution, where you and your employer both make contributions to the scheme. The rules specify minimum contributions of at least 8% of earnings being paid into the pension.

The employer has to pay at least 3%, so, the employee must then pay at least 5% (made up of 4% contributions and 1% tax relief) to meet the 8% threshold.

You might not love the idea of sacrificing your salary now, but it is ultimately a very strong way to build a nest egg for retirement. Let’s look at an example.

If an employee aged 25 earning £25,000 paid in the minimum 8% threshold, they would be making contributions of £2,000 a year to their pension, in equal monthly payments. If this earned investment growth after charges of 5%, then after 30 years, the pension pot could be worth more than £136,000.

But the actual contributions made were only £60,000, of which the employee paid only £22,500 and the rest was made by tax relief and the employer. The rest was investment growth. So that sacrifice of £2000 per year or £22,500 grew into £136,000.

Taking more investment risks can deliver higher amounts of growth. If the investments in the pension grew at 7% a year after charges, then for the same contributions, the pension pot could be worth £196,000 after 30 years.

If you’re not sure which type of pension you have, don’t worry, you can ask your employer or check your payslip and pension statement. The calculations in this video show what happens when you pay into your pension over time.

It can be life changing. So, when thinking about managing your finances, paying into your pension is one of the most important things you can do.

Understanding which scheme or schemes you are part of, when you can draw benefits, and how leaving points or career decisions affect your pension, puts you in a much stronger position when planning your future.