Latest article in Pathfinder from the Forces' Pension Society may be helpful to some...
The New Armed Forces Pension Scheme - How Good Is It And How Will It Work?
The Outline Scheme Design of the New Armed Forces Pension Scheme has finally been released, and with it has come the inevitable flood of enquiries as to exactly how its introduction will affect individuals...
Lieutenant Commander David Marsh, Pensions’ Secretary of the Forces Pension Society, looks at some of the Scheme’s important elements, and explains how these might impact on somebody on the AFPS75 pension scheme on the date of the new scheme’s inception...
Well, it has finally arrived – almost. There are still one or two details on the matter of the Early Departure Payment (EDP) system attached to the new scheme that need to be ironed out, but otherwise the package appears to be complete.
What of the scheme itself? The first thing that must be borne in mind is that the Ministry of Defence had little choice but to start planning the new scheme using a Career Averaging scheme structure. This was as a result of the study and subsequent recommendations to the Government by Lord Hutton’s report into the provision of pension schemes to the whole public sector.
The Civil Service already had its latest pension scheme based on a Career Averaging structure, but for the rest of the public sector, all, including the Armed Forces, were to move away from a Final Salary scheme.
The two types of scheme are quite different, and so exact comparison between them is not a simple exercise – and it is easy to find individuals who do better under one scheme or the other. In essence, the less successful you are in terms of promotion in your career, the more likely it is that a good Career Averaging scheme will be more advantageous to you than a Final Salary scheme; if you are a ‘high flyer’ then the opposite applies.
Having had the peace and quiet of a spot of leave to digest the document in full, along with the two DINs on accrued rights, I believe it is probably the best proposal out of all the public sector scheme choices in terms of a complete package. It is easy for the cynic to cherry-pick the worst of everything (that is what the press love to do to create sensational stories to sell newspapers), but in overall terms I am 100% sure that the scheme on offer is as good as the Armed Forces could have hoped for - and the biggest coup of all, was gaining the Treasury’s approval not to insist that members of the Armed Forces make personal contributions from salary towards their pension entitlement, at a time when all other members of the public sector were having the level of their direct contributions from salary increased!
Let’s now look at some of the most important elements of the proposed scheme and how it will operate in practice.
The accrual rate of 1/47th is very strong. What this means is that your annual pension award accumulates by 1/47th of your pensionable salary each year. For example if you were a Sergeant in receipt of a salary of £36,437, then your annual pension award would be £775.26 for that year’s service. If the same Sergeant received a salary of £37,412 for the following year, then the annual pension earned for that year would be £796.00.
The previous years’ earned pension will be revalued annually by an Average Earnings Index (AEI). There is more than one AEI, but it is understood the MoD will look to use the National AEI as the fairest index for the purpose of increasing the value of previous years’ earned pension. So, to take our Sergeant’s awards calculated in the previous paragraph, together with an assumption that the AEI was 2.6% for the first year, the first year’s award of £775.26 would grow to £795.42. It is the revalued figure of £795.42 that is then added to the £796.00 at the end of the second year, to give a new total value of annual pension award of £1,591.42.
To take the example one step further, if the Sergeant were subsequently promoted to Staff Sergeant three months into the next year, and received a salary of £38,237 for that year, and the AEI at the end of the second year was 3.1%, he would have earned a a further £813.55 (£38,237/47) towards his overall pension entitlement and his £1,591.42 would be revalued to £1,640.75 which, when added to the £813.55, gives the Staff Sergeant a new annual pension award of £2,454.30.
This may seem more complicated than the basic final salary schemes of AFPS75 and AFPS05, so how can an individual be expected to keep up with his or her pension entitlement. Well, apart from there being an online calculator available (it’s on its way), every serving individual will receive an annual statement of their current pension entitlement as a matter of course – something that you have been entitled to, but denied, for too long! This will remove the need to carry out these calculations yourself. That said, individuals should still be conversant with the processes carried out that lead to the forecast they receive.
To carry on with our Staff Sergeant’s career... Let’s assume that on the day of inception of the new scheme, he had completed 19 years’ reckonable service on the AFPS75 pension scheme, and will leave the Army after 22 years’ reckonable service on 6th April 2018. This means that there is going to be a split pension award on exit – some AFPS75 and some AFPS15. I will deal with the AFPS75 entitlement first.
Even though the Staff Sergeant will not have completed 22 years’ reckonable service on the date the new pension scheme started, he would, on his day of exit, have achieve that amount of service in total, albeit with 3 years of that service under the new pension scheme rules. Therefore, since 22 years’ service will be attained, he will receive an immediate pension and lump sum award on exit under the AFPS75 pension scheme rules.
The rules of AFPS75 state that an individual must complete at least 2 years’ reckonable service in the substantive rank in order to receive a full pension for that rank; if they complete at least 12 months’ reckonable service in the substantive rank, there will be a proportionate increase in the pension award based on the rates payable for each of the two ranks.
Unfortunately, as our Staff Sergeant did not complete 12 months’ reckonable service in the substantive rank, his AFPS75 pension award will be based on that of a Sergeant for the full 19 years.
The current annual pension award after 22 years’ service for a Sergeant is £10,509; therefore the award of a pension payable immediately on exit under AFPS75 would be 19/22nds of the £10,509 (£9,075.95) and a lump sum of 3 times that figure (£27,227.85).
What of the small pension earned under AFPS15? Assuming our Staff Sergeant is 41 on exit and has completed over 20 years’ service, his full pension becomes a deferred pension payable from State Retirement Pension Age. However, because he is aged 40 or over and has completed at least 20 years’ reckonable service, he qualifies to receive EDP payments.
The amount of EDP income stream payable is based on 34% of the pension earned plus 0.85% for each complete year beyond the EDP qualifying point. Our Staff Sergeant reached his EDP point at age 40 (he had completed 21 years’ reckonable service then), so given that he has completed one further year beyond his EDP qualifying point he will receive an EDP income stream of 34.85% of £2,454.30 (£855.32). Please note that you only need to hold the rank for one day and that one day’s salary in the higher rank is pensionable under the new AFPS15 scheme rules.
The amount of EDP lump sum is equal to 2.25 times the value of the pension pot. This means £2,454.30 x 2.25, equals £5,522.18. So, the overall award on exit for our Staff Sergeant is a lump sum equal to (£27,227.85 + £5,522.18) £32,750.03 and a total pension/income stream until State Pension Age of (£9,075.95 + £855.32) £9,931.27.
At State Pension Age the EDP income stream stops and the proper pension becomes payable. Our Staff Sergeant has a choice of taking all the pension in income, so the total pension would increase to (£9,075.95 + £2,454.30) £11,530.25, or he can surrender (up to) 25% of the AFPS15 pension and buy another lump sum at this point. If he did that, then for every £1 of annual pension surrendered, a £12 lump sum is paid. Surrendering 25% of £2,454.30 (£613.57) would buy a lump sum of £7,362.84, and the pension at State Pension Age would only be (£9,075.95 + £1,840.71) £10,916.66.
There will remain the opportunity for our Staff Sergeant to opt for Commutation of his AFPS75 element of his pension too, but I’ll delve into that issue in a future article.
Further Information
If all the above seems incredibly complicated or if you have any questions about the new Armed Forces Pension, AFPS 15 or your own military pension, you can call the Forces Pension Society on 020 7820 9988 for a rapid and accurate answer, assuming of course you are a member of the Society. If you are not a member, the fee to join is modest and benefits include an expert helpline, numerous discounts on a range of useful products and services and the assurance that a dedicated organisation, independent of the Government, is championing the pension interests of the Forces and their families.