Telegraph: Soldiers guide to the money minefield


Soldiers' guide to the money minefield

Last Updated: 12:44am GMT 13/11/2007

As Britain remembers its war dead Emma Simon looks at some of the financial problems unique to veterans and those currently serving in the armed forces

This Remembrance Sunday, the Telegraph looks at the financial issues affecting those currently serving in the armed forces and those who have fought for their country in the past.

Despite the dangers faced by many in today's armed forces, the financial assistance available is not always adequate. Many soldiers are expected to pay for their own life and health insurance, as the compensation available to those injured or killed on the front line may not be enough to secure their family's future.

advertisementPoliticians and commentators have criticised this situation, but until it is overhauled many of those serving today should find out more about the different products available to them.

Veterans also face many financial problems. The Royal British Legion and Veterans' UK provide a wealth of information on war pensions, disability payments and benefits. But below are some of the key issues that servicemen and women, past or present, need to consider.

Life Insurance

The Ministry of Defence will make compensation payments to the families of those killed in action and will offer a death-in-service benefit of four times salary to all those who die before pension age while employed by the Crown.

But financial advisers say service personnel should look at whether they need additional insurance on top. The amount of cover needed will depend on individual circumstances, but those with dependants may need to get extra insurance.

Life insurance will pay out regardless of the cause of death - whether it is on active service, from cancer or heart disease or in a road accident.

But those in the forces can sometimes struggle to buy this cover. Because of the nature of their job, some insurers are reluctant to take on these risks. There are a number of specialist providers though.

The MoD recommends a scheme known as Pax and underwritten by AIG. Nearly a third of British troops are insured through this scheme. Unusually, Pax will offer cover to those about to be deployed to dangerous regions, such as Iraq and Afghanistan. However, it has been criticised for effectively doubling premiums in the wake of losses following the high casualty rate in both regions.

But it isn't the only insurer to offer cover. Forces Financial is a specialist broker that provides a range of insurance and banking products for those in the armed services. It too offers life insurance to those about to be deployed.

"We use a panel of insurers. While there will be less choice and a higher cost for those who are about to be posted - or are serving - in regions such as Afghanistan or Iraq, it is still possible to buy cover," says a spokeswoman.

She says a 24-year-old male married soldier looking for £150,000 of cover would pay £8.06 a month if he is not currently under orders. However, if he is about to be deployed to a high-risk area the cheapest life cover would cost £35.26, although it would also pay out if he were injured.

Kevin Carr of Lifesearch, a financial adviser that specialises in insurance, says: "The best advice is to ensure that you buy life insurance when you need it, for example when you get married, take out a mortgage or have children. Don't wait until you are deployed overseas."

He says many insurers will offer life insurance to those who are not under orders, so it can pay to shop around rather than just get quotes from the forces' schemes. But he points out that people in certain high-risk jobs, such as fighter pilots or bomb disposal experts, will not get cover from a high street insurer and should talk to one of the specialist providers.

Injury payments

Anyone connected to the forces will have noticed the storm that has been brewing over the compensation payments made to injured soldiers. The scheme was recently revamped to ensure that those with serious disabilities receive the maximum payment of £285,000. For more information, see below.

However, those buying life insurance do have the opportunity to get private cover for injuries - in fact the MoD recommends that those under orders take out such insurance. Under the Pax scheme, for example, anyone losing an eye would receive £150,000, rather than the £28,750 the MoD would pay.

Forces Financial also arranges accident and critical illness cover that can be sold along with a life insurance policy. Again, these policies are cheaper - and there is more choice - for those who are not under orders. Life and critical illness cover will cost £22.03 a month for a 24-year-old soldier who is not deployed, compared with £35.26 a month to those serving in high-risk areas.

Carr says: "Armed forces personnel should be wary if buying critical illness cover on the open market as most policies would automatically exclude any claims arising from active combat."

"In many ways the financial support given to servicemen and women is disgraceful, but at least they do get a decent pension," says Mike Warburton of Grant Thornton, the accountancy firm.

There are two pension schemes for members of the regular armed forces. The first was introduced in 1975 and was closed to new entrants on April 6 2005. On that date a new scheme was introduced for new entrants; it improved key benefits, such as death-in-service benefits (which are now four times, rather than three times, salary).

This, like most in the public sector, is a non-contributory scheme where the pension is based on earnings. All those in the armed forces receive a 70th of their pay for each year of service, in addition to a tax-free lump sum worth three times their annual pension at retirement. This may seem less generous than traditional final salary schemes, where people typically earn a 60th of their pay for each year of service. But in most of these schemes people get tax-free cash only by giving up some of their pension.

If armed forces personnel are still serving at the age of 55 they can retire and are entitled to take their pension plus the tax-free lump sum immediately. If they leave before 55 their pension benefits will be paid at the age of 65; however, the armed forces - uniquely - do offer some extra pension benefits under the "Early Departure Payment Scheme".

This scheme aims to encourage people to remain in service at least until the age of 40 and to compensate them for the fact that a full career to the age of 55 or beyond is not available to the majority. People have to reach 40 or over and serve at least 18 years to be eligible for this benefit.

If people leave the armed forces after meeting these criteria but before the age of 55, they receive an income worth 50 per cent of their annual projected pension plus a tax-free lump sum of three times income. This income does not increase with inflation, but at the age of 55 they will receive 75 per cent of their preserved pension, which will then increase annually in line with the Retail Price Index.

At the age of 65 the early departure payment will cease and their pension will become payable. At this point they will get their pension plus the usual tax-free lump sum.

There is one other unique benefit attached to the armed forces pension. The Resettlement Grant (currently £9,576 tax-free) is intended to help soldiers adjust to civilian life and is paid to all those who have served for at least 12 years but do not qualify for the early departure scheme.

Many veterans fail to claim all the benefits they are due, according to the Royal British Legion. These benefits include Disability Living Allowance, Carers' Allowance and council tax benefit.

David Johnson of Veterans-UK, the Government's one-stop shop for ex-servicemen and women, says war pension payments (see box for more details) are generally disregarded when it comes to assessing an individual's eligibility for state benefits.

"Many people may think that their total income means they will not qualify for means-tested benefits, such as council tax benefit and pension credit," says Johnson. "But all local authorities now disregard these payments when calculating eligibility for council tax benefit, and they are often disregarded in relation to a host of other means-tested benefits."

Anyone seeking help on claiming state benefits should contact their local Veterans Welfare Service. A local assessment officer will be able to give further information on the benefits you may be entitled to, and where necessary help with completing the often complex government forms.

But Warburton points out that many armed forces personnel on active service are not eligible for other council tax benefits. "If they are overseas for a year or more and the property is empty or occupied just by their wife, you might think they could claim a discount on their council tax bills," he says - most councils do charge a lower rate for those who live alone. But because those in the armed forces are Crown employees, such exemptions do not apply; they will be assessed as though resident permanently and making full use of all local services. Warburton calls this "disgraceful".

Inheritance tax

Many veterans could benefit from a little-known loophole in the inheritance tax laws. If your death is a result of injuries or illness sustained on active service, your estate will not be subject to IHT.


This rule applies even if the death occurs years after the injuries were sustained. One Somerset-based solicitor recently won back more than £400,000 plus £24,000 in interest for the family of a First World War veteran who died in 2006. The solicitor, Peter Nellist of Clarke Willmott, says: "Few advisers or solicitors are even aware of this exemption so they don't inform clients. To date only a handful of relatives of ex-service personnel have managed to negotiate the tax refund. But it could apply to many now and in the future, including Gulf War veterans and those who have been injured in Iraq or Afghanistan."

He advises any serviceman or veteran who has been injured in action to keep all medical records. It is only if these injuries contribute to the cause of death that the exemption will be applied.

"In many cases involving the world wars, medical evidence may be lost, so veterans should prepare a detailed statement of wounds or diseases," Nellist adds. "Keep this statement updated and alert your family doctor to the issue. It is also vital to ensure that the death certificate records all causes of death."

Widows of those injured or killed in action should also remember that they will benefit from the changes to IHT announced recently. A widow (or widower) can now make use of their spouse's unused nil-rate band, which currently stands at £350,000. This would enable them to bequeath up to £700,000 before any tax is charged.

Julie Hutchison of Standard Life says even those who were widowed in the Second World War could still use this allowance, even if they have subsequently remarried.

Capital Gains Tax

Another little-known loophole that may benefit some veterans is that no capital gains tax is due if they sell their medals.


There are now two schemes that will award payments and pensions to those injured on active service or make bereavement payments to surviving spouses of those killed in action. The Armed Forces Compensation Scheme replaced the War Pensions Scheme in 2005. However, that scheme is still active and makes payments to all armed services personnel injured in action before 2005.

Both schemes will pay financial compensation to those who have suffered injury, illness, disability or bereavement as a result of active service. Depending on the severity of the condition, claimants will receive either a lump sum payment or a pension for life (or in some cases both).

These payments can affect any pension accrued through the Armed Forces Pension Scheme. It is worth remembering that any payment made under these schemes is generally disregarded when it comes to assessment for means-tested benefits.

Those who have received an award for bravery, such as the Victoria Cross, George Cross or Albert Medal, may also receive a pension or annuity as part of the award. Many servicemen do not realise that no income tax is due on such pensions. This also applies to any widow's pension paid if a servicemen is killed in action and receives an honour posthumously.


Veterans-UK: 0800 169 2277

Royal British Legion: 020 7973 7200

Forces' Pension Society: 020 7820 9988

Forces Financial: 00800 11 22 33 06

Pax: 0800 212 480

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