Military pensions and benefits explained
As part of your military service, you could be entitled to certain perks ranging from pensions to health coverage. But how do you know if you are eligible and when can you claim these perks? We break down how military retirement pay works and what it means for you.
What is military retirement pay?
Just like with any other employer, when you join the armed forces, you are enrolled into saving schemes that help you save for the future. When you retire from the military, you can start to claim these perks. But, depending on how long you served for, these perks can vary substantially from one person to the next.
The military pension scheme has changed drastically over time and isn’t always easy to understand. Today, members of the armed forces are enrolled on one of two retirement plans: The legacy High-36 plan or the Blended Retirement System (BRS). Under both of these plans, you will be eligible for a veteran’s pension once you have served for 20 years, although your payouts will be calculated differently based on which plan you are on. You will also have access to a Thrift Savings Plan (TSP). This is a personal savings account that works similarly to a 401(k). With a TSP, you can make regular contributions from your paycheck into this savings account. These savings are then invested into funds that generate different returns. Depending on when you enrolled in the military, the government may also make contributions to your TSP.
How are these plans different?
The legacy High-36 plan rolls the previous High-36 and High-3 plans into one. This retirement plan has since been phased out as the standard pension plan for the military, meaning only individuals who began their service before 3 December 2017 are part of it. In practice, this scheme is similar to a defined benefit scheme.
Once you have served for 20 years, you will receive 50 per cent of your base salary in the form of a monthly annuity once you have retired. For each additional year you stay in the military, you will receive an additional 2.5 per cent multiplier. Should you stay enrolled in the military for 40 years, you will receive a pension equivalent to your full salary. You will also have access to a TSP, but this is self-funded.
For people enrolled in the military after 2017, this system has since been phased out as a result of reforms. Driven by the growing costs of paying out pensions to a growing number of veterans, and the fact that many enrolled personnel didn’t stay in the military for a full 20 years and subsequently left without any retirement savings, the BRS was implemented to offer more comprehensive retirement benefits.
The BRS came into effect on 1 January 2018 and more closely resembles a traditional defined contribution pension plan that is found in the private sector. Under this system, veterans can still receive a monthly annuity for life once they have served for 20 years, although the additional service multiplier is reduced to two per cent. Under this system, however, the government also makes contributions to each veteran’s TSP. This means that each veteran will have a larger pool of savings they can use at any time, regardless of whether they go on to meet the 20 years of service necessary for a full pension.
How much will I receive from my military pension?
It is difficult to calculate exactly how much you will receive when you retire from the military. For example, if you retire before you have carried out 20 years of service, your primary form of retirement support will be through your TSP. And as this is invested into different funds, the amount you have accrued will vary a lot.
For those with 20 years or more of service, your pension will vary based on your rank and duration of service. As a rough guide, you should expect to receive around half of your base salary. For average soldiers, this is usually around $30,000 to $35,000.
Veteran’s pensions also come with an in-built Cost of Living Adjustment (COLA), tied to the Consumer Price Index, which measures inflation. In 2023, the COLA adjustment on veteran pensions will add an extra 8.7 per cent increase to monthly payments in response to the ongoing increase in prices.
What other benefits are there?
Veterans may also be eligible for certain social security benefits depending on their circumstances. Additional benefits can be made directly to veterans or can be used to support spouses and children of veterans. Some examples include health care benefits, housing loans and grants, education benefits, and life insurance.
Another benefit scheme is the Disability Compensation benefit. If you have a service-related disability or illness, you may be eligible for an additional tax-free monthly payment.
Veterans or survivors of veterans on a low income may also be eligible for a tax-free pension in the form of monthly payments from the Department of Veteran Affairs. Eligibility for this pension is based on financial circumstances.
How do I claim military retirement pay?
The process for claiming your benefits begins one year before your retirement date. You should receive a pre-retirement package from your branch of the armed forces to help you explore your options. Ensure that you attend any briefings on your retirement benefits and planning as you will need to start taking decisions on your retirement, and some of these cannot be changed.
Six months before your retirement date, you will need to provide key documentation that demonstrates your eligibility and helps calculate your retirement benefits. You will need to provide:
Statement of Service
A high average base amount of your salary
You will then receive your Data for Payment of Retired Personnel form (DD 2656) which sets out how you will receive your pay, tax information, and survivor benefit details.
When will I receive my first pension payment?
There are lots of factors that can impact when you will receive your first pension payment. As long as you have submitted all the necessary forms, you should normally receive your first payment 30–45 days after your retirement date.
What happens to my pension if I die?
Military retired pay stops once the recipient dies. However, there are ways that you can use your retirement benefits to support your spouse and children. Once you have retired, you can choose to take out a Survivor Benefit Plan (SBP) which guarantees an inflation-adjusted income to an eligible person.
You will make monthly premiums to this plan from your gross pay, so your premiums are tax-advantaged and don’t count as income. The premiums are also partially funded by the government, so an SBP costs substantially less than a conventional insurance policy.
Planning for your financial future isn’t easy. But by speaking with a financial advisor, you can get tailored advice that’s right for you. Find your next advisor on Unbiased.
Charlie Barton is a writer at Unbiased. He has been writing about personal finance and investing since 2017, with extensive knowledge of platforms and products. Charlie has a first-class degree from the London School of Economics.