Pensions Question

[whiskers123]

Hi, I'm currently on AFPS 05 and am thinking of taking out a private pension (SIPP) on top of this, for about £150 per month.

Does anyone know where to find any guidance if this is allowed or not and if there is any limits on contributions etc?

Thanks, Whiskers

[The Old Fat One]

I think AL R is ppruner you're looking for.

[Al R]

Whiskers,

You might not need a SSIP (they can be pricey, so why pay needlessly for functionality you'll never use - especially if you're starting with a balance of zero?). Having said that, if you want the bells and whistles, they can be worth it. I have a Higher Rate tax-payer ex-military client who religiously buys physical gold each month via his, and is currently paying just $800 an ounce (with 40% tax relief) which is being stored for him in Delaware. One or two of these credible, boutique providers are currently engaged in a price war, so management prices are tumbling.

You can have as many private pensions (SSIP or otherwise) as you like, and get tax relief on your contributions up to your annual salary. So, if you have an annual salary of (for example) £42k; then you contribute 30k and George Osborne gives you a further 12k as a 'thank you'. For a Higher Rate tax payer in his/her 50s who doesn't need all of the cash immediately and would prefer it as regular income instead, its a spectacular instant uplift on money and doesn't take into any further account investment uplift (or decline). You can take benefits from the age of 55 so for a mature saver/investor, it could be considered as an short/medium term investment tool in its own right, especially if you (rightly so, at that age) consider 'safe' or safer funds to invest in.

If your other half doesn't work or have their own pension, why not open one for them instead? They can get tax relief of 20% on contributions of up to £3600 pa and it helps with using their tax free annual allowance each year in retirement. As ever - take proper advice and if you need any help, or want any further info, feel free to drop me a line.

[zedder]

whiskers,
I certainly did the sort of option Al R recommended, and have been paying into a Stakeholders Pension for Mrs Z. The intent is to keep our overall tax liability down once we have both retired. Assuming I stay to 55, I'll likely be close to the 40% threshold once the Old Age Pension trips in as well.

The Stakeholders Pension has been invested in a FTSE All-Share Fund and what with the Tax Relief as well, has done very nicely. The only problem is the ever-decreasing annuity rates which mean that even a healthy 'fund' is not going to pay a fantastic income.

The client of Al R's that has been doing the Gold thing must have seen a very nice return given that Gold has shot up through $1300/oz!

[Al R]

Zedder,

If you have had that Stakeholder for quite a while, it might be worth shopping around. Market forces kicked in when the Stakeholder arrived, and the chances are that you are paying an older rate management charge - prices have come down over the years and most people don't know what they're paying.

Don't forget - since 2006, you don't need to have an annuity these days when you retire; you can stay invested within a pension and draw funds as you see fit up to the age of 75 (and that age was suspended in the emergency budget recently).

Make sure that investing in the FTSE is in keeping with your attitude, inclination and capacity for risk - as you get closer to 55 (or whenever you want to call it a day), you probably won't want your retirement funds to be linked to something as volatile so completely as the FTSE. You might want to consider slipping into good Corporate Bonds, Gilt, Fixed Income etc.

Yup, gold is doing well..

[zedder]

Al R,
0.8% with Scottish Widows. How does that compare?

[Al R]

Thats not too bad - it depends on the amount you have invested as to what rebate you can expect. If your pot is doing well too, you probably wouldn't mind paying a little extra; you'd be quite happy paying 2% and making 15%, compared to paying 1% and just making 4 or 5% I guess. Some pension products allow that higher sense of sophistication, choice and involvement.

[Al R]

The contribution you might refer to was formerly known as the Accruing Superannuation Liability Charge (ASLC). This charge changed and was calculated (variously) in the past on the basis of 33% of the total pensionable pay for officers and 18% for ORs, equating to an average of 22% or so of total pensionable pay. It is now known the Superannuation Contribution Adjusted for Past Experience (SCAPE), again - calculated as a percentage of military pay based on rank. The SCAPE contribution made by the MOD partially funds the payments made by AFPS in that year. This does not mean that 33% or so comes out of your pay, mainly because AFPS is unfunded and is derived on the basis of being a Prerogative Instrument.

When you refer to the 25%, are you refering to the reduction by abatement factor maybe?

[Lima Juliet]

Al

Can you explain to all the theory of 'oversubscribing' to a pension where your AVCs will effectively be taxed twice? An IFA tried to explain it when I was a Plt Off, but I never really understood it!

LJ

[Al R]

Leon,

When were you a Pilot Officer?! Perhaps the IFA was referring to days of yore, and HMRC Regs surrounding AVCs have changed over time.

Whatever the pros and cons of AVCs, the rules are simple really (no more than 15% extra benefit etc). As long as you stick to the AVC tables which relate to your income, age etc, you shouldn't inadvertantly step over the (oversubscription?) limit which might cause you to lose tax relief on your payments. Free Standing AVCs might be a different matter though, and might require more care.

The taxation double bubble he may have been referring to might involve the taxation on the benefit when your pension is in payment (another reason to load a lower paid/non wage earning partner's private pension provision?). But when it comes to paying at source, AVCs are tax friendly in their own right anyway, as your payments are taken, 'gross'. You don't get tax relief of course, which you might (if you are HMRC compliant) get with a privately sourced arrangement.

[Lima Juliet]

Al

P/O over 20 years ago. Thanks for the explanation, that pretty much as I remember it. I very nearly took a private policy for £75 per month until a wise IFA warned I would "oversubscribe".

Regds

LJ

[Topofclimb]

I'm no pensions expert, but I retired in 2005 on AFPS 05 and now receive approx 1/2 my pay as pension. I also took out a AVC pension which, I think, was the precurser of the SIPP and received an extra 40% on all payments and now receive a generous monthly sum from the "annuity" I bought with part of the pension pot. The cap on how much you can save like this was far in excess of any amount I was likely to save and I didn't pay any tax on the "lump sum" i took out of the pension pot when I retired and the monthly payments are taxed according to your tax code which in my case is at a very low rate;). Its certainly a good way to save as I can't think of any other way to get 40% interest!:ok:

[VinRouge]

TOC, to get this right, you paid into a pensions pot tax free, then, on retirement at 38, took out your annuity as a lump sum, including all tax?!

How much do your monthly payments add up to from your AVC, and how much did you pay into the AVC during the term?

Would make more sense to contribute to an AVC rather than overpay the mortgage if what you say is true.

[Al R]

Generally speaking, and as information, if you're on the cusp of retiring, think long and hard before taking an annuity, especially if you're in your mid 50s right now. Annuity rates are dire at the moment, you lose flexibility of income (why draw it and be taxed, if you don't need it?) and remaining invested via a SIPP or PP can allow you to capitalise on market growth and your fund to grow free of tax.

You can also identify a suitable retirement 'vehicle' (SIPP etc) and legitimately put your gratuity into it, gaining a further 40 or 20% tax relief on the tax free lump sum - if you can justify it as coming out of income and if your taxable earnings in that year allow it and if you are within your lifetime allowance. Of course, you can't access it all in one go, but you can then take 25% of it as a taxfree lump sum and effectively and annually 'rape' the fund balance or (given your assumed age) invest more safely over longer time, and slowly drip feed income from it.

As ever, take proper advice. However 'authorised and regulated' I am, don't take any post on tinternet at face value because a suggested piece of information leading to a particular course of action might not be best for you at any given moment.

[Topofclimb]

I prefer not to comment on the above post and questions as I can only really tell you what I did. I have no idea what SIPPS are, but, when I was at my 38 point (roughly) I started putting a couple of hundred pounds into an AVC each month. The tax man then gives you back £40 per 100 if, as I was, you are on the higher rate of tax. This amount was invested and made up a healthy nest egg for when I retired in 2005. When I took out the AVC you were capped in how much you could save ( I think you could basically use your flying pay element as "pensionless" pay) although I believe this has now changed, and if my memeory serves me correctly, you are allowed to save millions before you have to pay any tax-but as I said earlier its a while since I did this and can only really tell you what I did. Clearly, if you are on AFPS 05 (I was at the end) then you don't get flying pay. My nest egg was available to me when I retired although I was not 55 years old and I had the option of taking part of the cash as a lump sum, I seem to think this was 25% of the total. I invested this and the remainder I used to buy an annuity with Canada Life. This was before the "crash" and I shopped around and found that this was a good time to buy an annuity-interest rates were up at about 7%, so that is what I did. I now receive a monthly income from this annuity which works out at about 5% of the total, which is taxed at the standard rate depending on your tax code and other income. I'm sorry that this is a bit complicated and may not be entirely clear but as a bottom line I find my monthly payment a nice addition to my RAF pension and If I hadn't saved this money each month I probably would have just spent it anyway!

[Al R]

Antelope,

Simply put, an AVC/Free Standing AVC (an AVC bought externally) offers certainty. As you know, they are simply the means to buy extra years to add to your final salary AFPS. 'Certainty' of course, is not the same as 'better' when it comes to fund performance or wealth growth (neither does it mean ‘worse‘). Certainty just means that you know what you're getting in advance (it might not mean that its what you're after or what you need). A SIPP is a more sophisticated form of Personal Pension (PP). Going down that route instead of buying AVCs means that your money remains invested and exposed to market sentiment and therefore, technically, exposed to risk (the extent and nature of which depends on your fund choice/s).

A SIPP/PP offers much - 20/40% tax relief, flexibility, diversity and the chance to capitalise on improving markets (and unless you are fleet of foot and like to keep your eye on your investmentss, the chance to lose on declining markets). You may make far more with a SIPP/PP - but you may (technically) lose a lot. If you do go down the SIPP/PP route, remember to always keep on top of your fund choices. Have your IFA review them regularly and make sure that they are still performing well and in keeping with your wishes and aims. I am in the final stages of negotiating a tailored, low cost SIPP purely for military clients with the oldest SIPP provider in the UK, and so I am acutely aware that a SIPP has usually been too expensive for many of my clients, however much they would like the functionality, sophistication, flexibility and all round greater ability of them.

Remember too, that the biggest threat to your retirement fund is George Osborne. Tax can decimate funds in payment so again (I can’t emphasise the need enough to take advice about this) - if you have a partner who is raising the family or doesn’t earn as much as you, make sure that you invest in their pension funds first. They are allowed £6475 in income each year, without being pinged for income tax. There is little point in the main bread earner having a huge pension fund and drawing on it for both of you, and being subsequently taxed to the heavens, if one’s partner has no pension fund and if you aren’t making collective use of their tax exempt £6475 allowance. I have a civilian client who has reached a maximum LTA. Her ‘problem’ is not so much one of accumalation; rather she now has to deccumalate efficiently. Best not to get into that situation in the first place - however nice it might be.

Your reference to the Lifetime Allowance is nearly right - however, the numbers are a bit arse about face. A LTA is calculated by a factor of 20 if the fund is not yet in payment, and by a factor of 25 if it is. You could have applied for ‘Primary’ or ‘Enhanced’ protection, but you only had until 6 April 2009 to apply for it. You can contribute gross up to your taxable salary. So, when you refer to the 6k available for the year, remember that the 6k is gross, and therefore, you only pay 6k - 20% or 40%. If you’re a Higher Rate taxpayer, your pension fund contribution would therefore be £3600 pa and the State makes it up to £6000 for you. That 6k is then exposed to further gains or losses.

However, as ever these days.. ‘wait out’. It is being strongly, strongly suggested that the government will reduce the current £255,000 annual allowance to between £30,000 and £45,000 for all final salary scheme holders in order to deliver savings. As an AFPS member, your annual contribution is deemed to be the increase in your annual pension benefits multiplied by 10. Because the annual allowance is set at £255,000, this formula has practically no impact on the majority of AFPS members! But the multiple might (probably will be!) in future be set at between 15 and 20 instead (lets say x 17). So, if your annual limit was reduced to around £40,000 and the formula toughened up, many more people would fall into the net.

Lets take your example, and assuming that you were a 50 year old serviceman earning your 50k pa. We‘ll assume that you have 25 years' service, and in AFPS of course, where the benefit is one-sixtieth of final salary for each year's service. If (under the strongly rumoured/ ‘proposed’/ leaked new Regs), you received a promotion and pay increase to £60,000, you could find yourself hit with a £19,000 tax bill at the end of the year, assuming the multiple was set at 17 and the annual limit at £40,000. This is because under the new formula, your pension rights would be equivalent to someone paying almost £88,000 into their pension, but anything above the new £40,000 annual allowance would be taxed at 40%.

Sorry if I haven’t explained that well or clearly - I am clockwatching and have to be at Cranwell this afternoon (well, I had to make it there one way or another http://images.ibsrv.net/ibsrv/res/src:www.pprune.org/get/images/smilies/wink2.gif). Wait to see how the dust settles with the CSR.. and always take proper advice.

[Topofclimb]

Al, my AVC was nothing to do with my service pension. I didn't buy any extra pension years with it, I got a lump sum, roughly 130K, took about 30K as a lump sum, tax free, and now get a monthly sum of £500 ish. I'm not sure your service pension calcs are correct either, my pension is based on 35/70 so every year is worth 1/70th. If you were on the top rate of the PA spine, worth 1st year group captain, 70K+, your pension would be 35K ish. I may have read your post incorrectly but that how my pension works out.

PS you sound as if you know what you are talking about, I'm not sure I fall into that category:\

[Al R]

Hi Top of,

Your AVC would have to have been contributions added to some pension (maybe not mil?). Was it 'free standing'? My post was more about annual and lifetime allowances, and not so much, working out a pension in payment.

However much you do or don't know, it seems like you knew enough to get yourself a pretty good deal.;)

[Al R]

Funnily enough, announced this morning:

Financial Secretary to the Treasury announces changes to restricting pensions tax relief - HM Treasury (http://www.hm-treasury.gov.uk/press_52_10.htm)

Financial Secretary to the Treasury, Mark Hoban MP, announced today that the annual allowance for tax-privileged pension saving will be reduced from £255,000 to £50,000, and the lifetime allowance will be reduced from £1.8 million to £1.5 million. This will replace the complex proposal legislated for by the last Government in the Finance Act 2010.

This measure will raise £4 billion per annum in steady state and will help reduce the record Budget deficit that this Government inherited. It will be targeted at those who make the most significant pension savings. An annual allowance of £50,000 will affect 100,000 pension savers – 80% of those will have incomes over £100,000.

My initial thinking is that if you are retiring in the next 6 months or so and/or are going to be in receipt of a large lump sum, if you are staying in work and don't possibly need that lump sum all in one go immediately, and if you want to make an immediate gain of up to 40% (tax relief) by way of a one off contribution into a private pension scheme, then you have until April to consider doing so. Also, if you already chuck money hand over fist into a private scheme, then you might well be about to be face more limited options. There does seem to be provision for offsetting a previous allowance though.

[LFFC]

Al,

The announcement today has really put the cat amongst the pigeons. I know it’s a bit early to give a definite answer, but given your last post, do you think that anyone about to retire within the next 12 months, who will receive a full immediate pension and gratuity, will be adversely affected?

:ooh:

[Al R]

That depends what their plans might be. The fact that annual contributions are being hammered will limit future options (especially for high earners), but in terms of those retiring in the next 12 months, actual AFPS provision won't be affected, no.

However, someone retiring with a gratuity that they planned on placing into a Personal Pension, such as a SIPP, in order to make up to 40% overnight, could well find their plans changing. Not adversely maybe, because you can feed contributions in over more than one year of course, but there is certainly a lot more to consider.

Some may choose to consider Venture Capital Trusts instead for instance, which are riskier (with higher potential for high returns), which don't offer as much tax relief (just a flat 30% - but that still makes them attractive to lower rate tax payers who are more inclined to be younger and slightly less risk averse), and the cash is only tied up for a few years - not until aged 55.

HM Revenue & Customs: Venture Capital Trusts (http://www.hmrc.gov.uk/guidance/vct.htm)

[LFFC]

Thanks Al, that's a good pointer.

Another thought just came to me; if a 24 year sqn ldr on AFPS75 gets promoted to wg cdr then his pension instantly raises by £7,000 pa. Might that mean that he gets hit by a £20,000 tax bill?

Tax-free amount staff can put into pension is cut to £50,000 a year (http://www.thisislondon.co.uk/standard/article-23887644-tax-relief-on-pensions-expected-to-be-slashed.do)

However, pensions experts say middle-income earners on £40,000 to £50,000 who have been on generous final-salary schemes all their careers could be caught, resulting in big tax bills.


I think that quote started me worrying!

[Topofclimb]

I think mine was called a "Free standing AVC" (in my case stands for Audi Veryfast Car savings scheme) and was with someone like Standard Life. I watched the recent Panorama about pensions, definately worth doing plenty of research, which I did, yes, it all worked out OK for me although I'm not driving my new R8 cabrio today as its drizzling. Maybe I'll polish it instead!:rolleyes:

Looks like the "Golden Era" of military pay and pensions is about to come to an end, oh look there's a twin engined exec jet just flown over with a trainee navigator in the back-now thats cost effective, especially as they have to avoid all the retired senior officers flying around with air cadets:ugh:

[Grimweasel]

It’s rather galling that we are all making the best efforts to save our cash for the future whilst at the same time nations are racing to devalue their currencies and store up massive inflation for the future. Inflation is the killer of saving and in this current climate I have less and less faith in the fiat currencies as time goes by.

If the Fed chooses more 'accommodation' (QE2) in its Nov meeting then the USD could suffer even more and drag other G20 currencies down with it. Why do you think Gold is in a secular bull trend? More and more people I know in the city are moving into physical gold as there is a good chance that even paper held gold (ETFs, ETCs, Gold Mining Shares) could become worthless to as you'd be selling and converting them into a falling and worthless fiat currency. Coins and Bullion have the problem of VAT being added and I’d be interested Al, to know more about the mechanism for placing physical gold into the SIPP (esp the fact the Government tops up some of the price!)

I think the next 5 years we will see a huge shift of power to the East. China is now the economic powerhouse holding all the aces. Whilst the West binged on debt, China soaked it all up and became a huge creditor; it now has the ability to hold the west to ransom. All this talk of China needing US consumption to survive will soon be a distant memory as domestic consumption from a growing middle class starts to pick up where the falling US consumption tails off. The fall of the great US Empire is going the same way as all Empires from the Romans to the British. Over stretched and breaking under the strain of massive consumer and government debt. In an environment such as this paper assets could become worthless so I would advocate getting hold of physical assets that will retain some worth – gold, land, art, stamps, property etc. SIPP the lot! And bury some coins in the garden as there is a good chance that gold ownership could be banned (as it was in the US back in the 1930’s!!) by Governments.

Al - What, in layman’s terms does this new pension ruling mean to us? Does is affect the lump-sum and what we can do with it? I was fully intending to top my SIPP up with the lot (après a few debt payments etc)

[Al R]

Grim,

In Layman's terms, not a lot. If you think (in the most basic terms) that an average final salary pension pot in pre payment, might be £500,000 accrued over 30 years or so, you will still have plenty of wriggle room. The SIPPs that I buy gold for, are niche SIPPs although Standard Life will allow it from the end of this year. For my (mostly mil/ex mil) clients, my SIPPs will take physical gold quite easily (it is stored in Baltimore) and although it just sits there absorbing neutrinos, buying it at 40% discount and CGT free for a SIPP is a neat idea (for some of course, not for all).

The US g'ment proved with QE1 that it cannot sex up the economy without a drastic cut in the value of the dollar. If many of us responded to QE1 though, by hoarding gold instead of spending cash on fridges and new cars etc (as what happened), then Obama knows that the chances of a hot (let alone a cold) restart are slim with QE2. The Fed will begin to print money at huge rates, but how can it restart the economy if the printed money is simply taken and stuffed into gold? So, does he confiscate gold - does he stop us from buying it up and compel us to spend it?

BRIC funds are no longer so 'emerging', rather more these days, 'evolving' or 'growing'. However, with that growth will continue to come inflation and devaluation - we certainly live in interesting times. The basics ring true again - all things in moderation, diversify properly, 'hedge' against worse case scenarios, have a plan that allows you to be proactive and reactive, know WHY you are doing what you're doing, be contingent, remain flexible and stay involved with your money. If you want to trust the bank and its financial review once a year, then fine - but if you don't - consider Plan 'B'.

[Grimweasel]

Agree totally Al - thanks for a great post that confirms my thoughts too. Mates a la city are all saying that if QE2 does go ahead then the only benefactors will be the BRIC economies in the search for yield. I think QE2 is looking more and more shady as the weeks pass. The recent rally in stocks has all been QE2 driven as people try to get ahead of the curve. I fear many could get burnt. With Mid-terms due though I doubt that the president wants the distraction of another lurch into depression so I guess QE2 could still be on the cards. Oh for the Bretton-Woods days - without the physical gold to pack up each printed dollar the Fed can pretty much do as it wishes!!

I fail to see the benefits of QE1 or 2 - all the markets are doing is raping the tax payer in the biggest transfer of wealth in human history. This Maddof style ponzi scheme run by the Fed is about to go bust and possibly take most of the Western economies (and our savings) with it. Grim times...

[Pontius Navigator]

I think a lot is media hype and totally irrelevant to even a well paid wg cdr. The limit of £50k per year would only realistically apply to someone with £50k per year spare salary.

It could, for instance, apply to a couple of sqn ldrs who chose to put one salary into the pot. For the average Joe, including those on PA Spine, it would only apply it they wanted to put their gratutity away into the pension pot.

Being realistic that gratutity may well have other calls on it, like the new kitchen or bathroom.

IMNSHO the Torygraph is just trying to inflame opinion against the coalition. Brogan, OTOH, seems more in favour of the coalition now.

[Pontius Navigator]

Anyone have any thoughts/info regarding the CPI/RPI increase next april. I read with interest that the state pension is rising with RPI next april, CPI from then on. Benefits will rise by CPI.
Do you think we shall follow state pension or benefits?
Sep 2010 RPI 4.6%-CPI 3.1%
Big difference over a few years!

Take it on the chin

We're all doomed I tell, doomed .........

Oh, and to answer the question, what do you think George would do? :oh:

The following web site harks back to July but essentially shows that there are questions such as yours:

CPI Pension Increases | Pitmans Lawyers News (http://www.pitmans.com/news/cpi-pension-increases)

[The B Word]

Was trying to reconcile the relevance of Cunard's latest liner (QE2) to pensions and the realised that QE also stands for Quantitative Easing!

:}

The B Word

[LFFC]

I just found this which sheds a bit more light on the question I asked earlier.

Tax relief on pensions is reduced (http://www.bbc.co.uk/news/business-11539238)

There seems to be good news and bad news. First the bad news.

The annual limit will be reduced from £255,000 to £50,000 in April.
.
.
The formula for calculating the increase in someone's pension if they are in a defined benefit scheme will also become more aggressive.

The increase in accrued pension will be multiplied by a factor of 16, not 10 as at present.

So someone whose pension entitlement increases by more than £3,125 in any one year may be faced with a tax bill set at their highest rate of tax.


So just about any sqn ldr (or major) on AFPS75 will fall into that category on being promoted.

Now the good news:


However they will be able to offset that year's increase in their underlying pension pot against any unused tax-free allowance from the previous three years.


Not sure how that will work in practice, but it looks like things won't be too bad.

:rolleyes:

Unless you're a One Star or above - and then it looks quite hideous! :sad:

[Al R]

LFFC,

As with most things, its not until you're about to lose something, that you start to realise how good it is. We have had anti-forestalling rules in place for a while which effectively, limit a wealthy saver's opportunity to get maximum public subsidy. As I suggested, there will be some form of Transitional Protection (just as we had Enhanced and Primary Protection a few years ago), so although the BBC piece casts a little more light on things, the picture is still emerging. It is good news that one off lump sumps (such as redundancy payments/gratuities) might be exempt (there can't be many more satisfying ways of getting 40% tax relief on a slug of tax free cash) and another saving grace is that the Annual Allowance is removed in your final year before retirement anyway. So, unless that gets removed too, it could be that high earners simply look for some form of intermediate 'coping' strategy to see them through until the final year before making one final large contribution with otherwise accrued income.

The people who will suffer are not going to be so much those who are mature, high-ish earners, rather the self employed who find cash flow difficult to project and younger graduate professionals who will fall behind and become prey to the 'cost of retirement delay' and working out how to pay off their soon to go through the roof tuition fees and saving for their retirement. I can see why the G'ment has done it - on the surface it is an elegant and simple solution, but its a short term fix. Yes, it might get more money sloshing around the economy, but it is going to stash away problems for 40 years hence.

The social battleground of the future may not be divided so much on North/South, Rich/Poor divides, but rather; Young/Old. Baby Boomers have had it good, certainly a lot better than those currently in their 20s and 30s and this is the State calling 'time'. We have taken their annual allowance for granted for far too long and we forget we can be 30+ years in retirement - 30 years which see fitter healthier people wanting to enjoy life longer and longer - but with what?). Now, retirement has been placed into much sharper relief so when I ask clients if they have used their annual pension entitlement as they might use their annual ISA allowance, it will have real meaning - it is not some whimsical quarter of a mill figure that has no meaning to anyone. It is going to compel/induce people to face up to the future and the potential consequences of doing nothing. On balance, these measures are a good thing because they can be circumnavigated with a little insight and foresight and because they will compel people not to take retirement planning for granted.

[Al R]

Whilst we're on the subject of pensions, one door closes and er.. another one closes.

International Adviser :: Army bans transfers to Wenns QROPS (http://www.international-adviser.com/article/army-bans-transfers-to-wenns-qrops)

[Melchett01]

Just to add insult to injury today, when we weren't flapping about the cuts, our Colonel came in and well and truly startled the horses concerning the latest pension arrangements.

Defence Intranet had an interesting piece on the impact of the latest reduction in contribution limits, which seemed to imply - unless we had it wrong - that many personnel could be due to get a rather nasty surprise in the form of a pensions related tax bill.

According to the blurb

the value of contributions to defined benefit pension schemes is deemed to be the increase over the year in accrued benefits. In calculating accrued benefits, the increase in annual pension will be multiplied using an actuarial factor of 16 (currently a factor of 10 is applied); both changes will be applicable from the tax year 2011 / 2012. This essentially means that the overall amount which is contributed to your pension annually will be multiplied by 16. if the total calculated contributions are in excess of £50,000 then you will have exceeded your annual allowance.

So, assuming that an individual hasn't taken out any AVCs, which count towards this limit, the to stay under the 50K limit means that our pensions can't increase by more than £3,125 / year. However, I had a quick look on the MOD Benefits Calculator (different to the pensions calculator). For an SO2 pension, the Benefits Calculator states that the annual value of your pension (Employer's Contribution), the value of which might be estimated at £16,859.

Now, the crux of the matter is this 16K value - is that the amount the MOD actually contributes each year, or is that the market value i.e. what you would have to contribute if you were to go to the open market looking to invest? If it's the former, then 16.8K multiplied by the actuarial factor of 16 puts your annual contribution at around 270K. With a 50K annual limit, this could potentially mean a 40% tax bill on the 220K difference.

Has my entire office got it wrong, or are we potentially facing bankruptcy trying to pay an annual tax bill well in excess of our total salary or will our pension payments essentially be handed straight back to the Treasury as tax payments? Having spent the best part of the past 10 years getting repeatedly shot at, I have to say I am for the first time more than a little worried! :uhoh: This could affect how many people ..... if the intention is to finally kill off the 75 scheme and get people to leave, depending on how they handle this they might just have managed it.

[Willard Whyte]

Melchy, I've had too much red wine to fully* understand what you're on about.

*Actually, none of it makes sense to my alcohol ridden physique.

[Melchett01]

You know Willard, that's not a bad idea!

[Willard Whyte]

Come join me. 'Tis only a cheap plonk mind, all one feels one should fork out for right now.

[Melchett01]

Have you really? I bet the only people who have been shooting at you in your air conditioned office are those who have been flicking elastic bands at you. Blunties!!! Don't you just love em?

I know, it's shocking. And for some reason they get upset when you shoot back with 5.56.

[Al R]

Melchett,


Now, the crux of the matter is this 16K value - is that the amount the MOD actually contributes each year, or is that the market value i.e. what you would have to contribute if you were to go to the open market looking to invest? If it's the former, then 16.8K multiplied by the actuarial factor of 16 puts your annual contribution at around 270K. With a 50K annual limit, this could potentially mean a 40% tax bill on the 220K difference.




Thankfully, you are wrong. Its an unfunded scheme, which means the money isn't physically lodged with Xafinity Paymaster (which adminstrates AFPS once in payment). Its paid by the State as and when it needs to, and if that means the State raising taxes in 30 years time (or whenever) in order to do it, then thats what it'll do.

To get the figure, you need to make lots of assumptions, least of all based on the fact AFPS is a 1/60th scheme. Some people will be getting pinged with a tax bill, I have no doubt - but not many at all. If you want to drop me a PM to put your mind at rest, then feel free to send me some numbers. This link might be useful for some.

Armed Forces scheme pensions pensioners queries Xafinity Paymaster (http://www.xafinity.com/Microsites/Xafinity-Paymaster/Contact/Scheme-Members/Armed-Forces.aspx)

[Sand4Gold]

Al R,

Very good informative posts - thank you.

Just a bit confused.com - you keep stating that 'the AFPS is a 1/60th scheme';are you sure?; is it not 1/70th? Or have I missed something?

S4G

[Al R]

Sorry, me typing with brain in neutral - yes, it is 1/70th of course.

(The fractioning doesn't apply to '75', just '05' which works out the pension on the best 365 days of the final 3 years including Substitution Pay in any of the final 3 years, so it might not always be the final 12 months in service).

[bob9]

AL R, If I could ask you a question. Over the last 2 days during one of the briefings we were advised to seek professional advice as our public sector pensions were being looked at (by the government not the air force). I was aware of the recent changes but i tried to read through the previous posts but soon got lost. Here is the question then; I have planned remaining in the air force due to my pension and more particularily on my tax free lump sum. I thought the £50,000 to £250,000 discussed was the amount you paid into your pension per annum and not what you receive so I am fine. If I leave the air force in 2013 is my max com sum (around 60K) still tax free or are they talking about changing that? I realise that many people are worse off than me than me but having served over 18 years and suddenly finding out that i only have about 2 years to go the thought of my pension being halved is obviously of interest to me. :confused:

[Al R]

Bob,

I am in Norfolk with clients the week after next - possibly the same unit as you.

Firstly, the amounts mentioned (250/50k) are the annual amounts that you once could/ now can put into your pension fund each year before incurring tax. In the case of mil, its a nominal amount allocated by the MoD for you and not what you put in yourself.

The amount that you mentioned commuting is tax free and there is no suggestion that the State is going to change that. You can invest it as you wish, or place that into an other pension fund to gain further tax relief if you are still earning and don't need it immediately.

Hope that helps.

[The B Word]

I must admit I am confused as I thought this was the case from the Armed Forces Benefits Calculator:

The Armed Forces Pension Scheme is a non-contributory pension scheme; this figure [in the calculator], therefore, provides you with an indication of the amount of money the MoD contributes annually on your behalf towards your pension. The value quoted is based on SCAPE rates, which are routinely valued by the Government Actuary’s Department. However, this figure is illustrative only, and does not represent the value accruing to your pension. SCAPE rates represent the amount the MOD contributes per person for the total cost of Armed Forces pensions, not the amount payable to individuals.

Now from the benefits calculator the much vaunted, just about to get clobbered, Wg Cdr rate under SCAPE would be £24,286.75 - which is nowhere near £50k pa even if it was contributory (which it isn't!).

Confused of NATO sends :confused::confused::confused:

[Al R]

Rather than start another pensions thread.

The Finance Bill 2011 finally received Royal Ascent yesterday (at 1435 if you're interested) with several negative effects on pensions, so it is now an act of Parliament. At present, it would appear that there were no last minute amendments to the proposals.

Annual pension contributions of over £50,000 may be subject to tax charges (Annual Allowance) and lifetime benefits from pensions of over £1.5m may be subject to tax charges I (this could affect anyone with a likely AFPS income in retirement of over £70,00 or so). It may be prudent to arrange for 'Fixed Protection' with HMRC, particularly if your notional pension 'pot' is likely to breach the new £1.5m limit.

This recent article from The Telegraph summarises most of the messages surrounding the changes and the subsequent challenges to many public sector final salary schemes, some of which apply to AFPS. Those at the higher echelon of the rank structure, or planning to be, might want to think about their retirement planning and how AFPS fits in with it, and how it will fit in with AFPS. The pensions picture has changed, and it will continue to do so.

Doctors quit gold-plated pensions - Telegraph (http://www.telegraph.co.uk/finance/personalfinance/pensions/8526449/Doctors-quit-gold-plated-pensions.html)

[andgo]

Latest interesting pensions rumour is that if you leave post any 'change' to the current pension schemes, you 'may' be entitled to your gratuity, but you will not receive your pension til age 60 despite having to leave at 55. Anything accured before 'change' will be honoured, but not til you're 60.
Anyone likely to stay beyond the change who is already past IPP?:=

[Grimweasel]

Andgo-

In that case thank god I'm pensionable in Jan 12 - along with a shiny new MBA all being well. Goodbye Services - it was nice whilst the good times rolled. Time to run and grab all I can before it changes ;-(

I have heard this talked about before - there was talk of scrapping the immediate pension for Offrs at 38 or 16 Yr point - or 22 yrs for NCOs etc - and not getting your pension until 65!! - Oh and I also heard that HRMC are looking into taxing the 'Early Departure Payment' for those on AFPS05. I can see people running for the JPA Termination button already.

[Melchett01]

Latest interesting pensions rumour is that if you leave post any 'change' to the current pension schemes, you 'may' be entitled to your gratuity, but you will not receive your pension til age 60 despite having to leave at 55. Anything accured before 'change' will be honoured, but not til you're 60.


That very question was asked at a recent Air Manning briefing whilst on a course, and they came back with the answer that categorically whatever you earn before the change date (2017 is allegedly when it will kick in) is yours - gratuity, immediate pension the works. If you serve say until 2020, you would get your gratuity and pension based on service until the change in 2017 but the final 3 years of service would be preserved until you were 60 under the new scheme.

Unless of course they were wrong or telling bare faced lies - neither or which Manning would ever do. Right? Forces Pension Society would probably be the best place to go and ask that very question though.

[Al R]

Oh and I also heard that HRMC are looking into taxing the 'Early Departure Payment' for those on AFPS05.

Generally speaking, if the talk about cutting back on the EDP benefit is pretty comparable to taking tax free cash from a personal pension, then there has been talk of taxing that doing the rounds too. Nothing definite, nothing certain, just a reflection by GO that GO has to find more money from somewhere! If we assume that the very last benefits he will cut are going to be child related allowances for the lower paid, how much further up the list will tax free cash from pensioners be?

HMRC is looking at taxing anything and everything at the moment - its not personal to HM Forces if thats any consolation. We can probably say goodbye to VCTs pretty soon, and there are lots of disturbing reports being bandied around by charities representing the lesser paid, regarding pension contribution tax relief. So, in general, consider diversifying away from an unhealthy over obsession with any one particular pension scheme and strategy, and consider all options including Offshore Bonds, personal pensions for a wife/husband who doesn't have a large personal pot (unrelated to the size of their tum), maxxing out on an ISA and now of course, the Junior ISA too.

See your bank salesman, an IFA, phone a friend.. but the sooner you do something the better.

[Jumping_Jack]

So, the latest gen states normal pension age for Armed Forces will be 60, but retirement remains 55. Guess I shall be poor for 5 years on leaving the RAF (unless redunded first) :hmm: (Of course people are our most valuable asset......)

[Really annoyed]

So, the latest gen states normal pension age for Armed Forces will be 60, but retirement remains 55.

Where does it state that?

[Jumping_Jack]

...........ibn 14/11

[Red Line Entry]

It says:

"The Normal Pension Age for the Armed Forces is recommended to increase from 55 to 60. This does not mean that everyone will have to serve until age 60, in the same way that, at present, very few personnel serve to age 55. This recommendation does not apply to the deferred pension age."

I don't read that as retirement remaining at 55. Moreover, these are only RECOMMENDATIONS. The IBN also says:

"The Government has agreed that, because the Armed Forces do not have Trade Unions to represent their views, a separate consultation process will be needed. This has yet to be established. Until this consultation process is complete it will not be possible to say what a new pension scheme will look like."

So don't panic Mr Mainwaring - lots of water to flow under the bridge yet...

[The B Word]

Red Line Entry

The sad thing is that I interpreted it the same way as Jumping Jack and so I am not that confident that you are correct. Currently preserved pensions are paid at either 60 or 65 depending on whether you are on AFPS 75, AFPS 05 or RFPS 05. So I can see a gap of immediate pension happening; I've also heard rumour of lump sum at 55 and then pension at 60 from several sources.

The B Word

[ALM In Waiting]

Does anyone know if these changes happen what the effect will be on an NCO still on AFPS 75 but who has not yet completed 22 years?

Is it likely that your immediate pension would be deferred to age 55 or even 60?

Or will it be that whatever has been accrued up to the date the schemes are changed? I.e. 17 years worth of pension contributions are payed at the 22 year point, remaining 5 years worth deferred to 55/60.

Sorry if I'm being somewhat dense, but I'm finding it a touch confusing.

[Really annoyed]

Pension benefits under the existing Armed Forces Pension Schemes will continue to be earned up to the introduction of the new scheme. The Report makes it clear that pension benefits already earned will be protected on adoption of the new scheme. For the years that an individual has already served, and until reforms are made, all of the pension benefits already earned will be kept. These benefits will be worked out in the same way, with individuals being able to draw them at the same age as they can now, based on their final salary on the date that they retire.