The term 'Chelsea Pensioner' has been used over the centuries to describe both ‘In-’ and ‘Out-Pensioners’. An ‘In-Pensioner’ is simply one who resides in the Royal Hospital Chelsea. On entry, he surrenders his army pension. An Out-Pensioner is a former soldier of the Regular Army who receives a pension for long service and/or disability caused through service.

The term derives from the period when the Royal Hospital was still being built. James II, who succeeded King Charles in 1685, made the first attempt to put Army pensions on a systematic basis in 1689. He decreed that a daily allowance should be made to all soldiers disabled by wounds or accidents, who had become unfit for service or who had served for 20 years.

By the time the Royal Hospital opened there were more Pensioners than places available. Those that could not be offered a place were termed Out-Pensioners. In 1703 there were as few as 51. However, the increasing size of a standing army meant that the number of Out-Pensioners rose steadily – from 739 in 1708, to 14,700 in 1763 (after the Seven Years War) and 36,757 in 1815.

The Royal Hospital remained responsible for all army pensions until 1955.