AFPS: Hutton's Review of Public Sector Pensions approved.

[Al R]

Budget: George Osborne accepts Hutton review of reform of public sector pension contributions.

Budget 2011: Public sector pensions contribution rate to rise 3% - Citywire (http://citywire.co.uk/wealth-manager/budget-2011-public-sector-pensions-contribution-rate-to-rise-3/a481127)


Members of unfunded public sector pension schemes will have to contribute an extra 3%, the Chancellor George Osborne has announced. He announced a consultation on how public sector pension liabilities are calculated would conclude that higher contributions were needed to address the shortfall. He also indicated there would be further rises in contribution rates in years to come. Osborne said he would look to take on the recommendations of John Hutton's Independent Public Service Pension Commission review.

[draken55]

As the press item shows, the contribution increase could well have been greater and contributions do continue to receive tax relief:uhoh:

[Exiled]

Al,
Also of interest is the following, which is taken from HMT's briefing material.

The Government accepts Lord Hutton’s
recommendations as a basis for consultation with public sector workers, trades unions and others, recognising that the position of the uniformed services will require paricularly careful consideration. The Government will set out proposals in the autumn that are affordable, sustainable and fair to both the public sector
workforce and the taxpayer.

[Ken Scott]

AFPS is non-contributory, but pay is abated by about 6% in lieu of pension contributions. Does this mean that the abatement will be increased by 3% or will we have a deduction on our monthly pay? Our final salary (or eventually carreer average) pensions are based on our net pay rather than gross (ie: including the abated element), so if the abatement is increased does that mean smaller pensions still? :confused:

[Exiled]

Ken,
The current AFPRB abatement of the civilian pay comparator is 4%. However, Hutton specifically excluded the Armed Forces from the increase in contributions so we will not be affected until the introduction of a new scheme.

[Al R]

Exiled,

Yes, the abatement issue is vital because he won't want to see any single element of the public sector being compensated with a pay increase in the next two years, which would have to happen with HM Forces of a pension contribution sting of 3% or so was awarded.

What will affect though, will be the drawing of benefits, and the fact that in thr forthcoming years, there will be a (larger) contribution.

[Ken Scott]

What will affect though, will be the drawing of benefits, and the fact that in thr forthcoming years, there will be a (larger) contribution.

Al R: could you expand, please? What exactly will be the effect on drawing your pension?

[Melchett01]

What will affect though, will be the drawing of benefits

I assume that as we will be going to a hybrid scheme and that the principal of accrued rights is implemements, then we will still be able to draw that portion of our pensions accrued before any change at 38/44, but that you will not be able to draw whatever pension you accrue after the new scheme kicks in until 60/65?

Please tell me that's the case and that pensions previously payable at your 16/38 aren't now about to be pushed back til 60/65? :eek: :confused: :\ :{

[Al R]

Melchett/ken,

Correct, thats Hutton's recommendation.

All accrued rights will be enshrined iaw Terms & Conditions of any previous scheme (75/05) up to the time and point of handover to a new scheme.

[VinRouge]

Didnt Hutton also recommend delaying the introduction of a change to Armed Forces scheme as part of the report?

[Al R]

Some groups, such as the Armed Forces and police, were granted a longer transition period ('if needed') and were shielded from the full glare of pension contribution proposals last October.

Hutton has already personally acknowledged that the long-term funding of public sector pension schemes has already been cut by 25%, so he can afford to be a little flexible with those who have a unique career profile, such as those in AFPS.

[Party Animal]

Okay - hands up - thicko aircrew here. Can we attempt to put this in plain language? Or even, I will throw in a few generalisations for comment/clarification and we can debate further. So ignoring redundancies, PA spine and AFPS 05:

As it currently is (I think) - Individual A is 45 years old tomorrow and has served since the age of 21. Let’s just say if he/she left now, they would get a pension of 20k. This would remain flat until they reached 55 and then the 20k would be index linked. But, they could also play the pension calculator game and see what pension they would get if they were 46, 47 ...etc up to 55 years of age such that if hypothetically, they were 55 tomorrow, they would get 30k, that is automatically index linked.

Now put this into the new equation:

Individual A is 45 tomorrow with a potential 20k pension (if they left now) but decides to stay to 55. The new pension scheme kicks in the next day. For the next 10 years, pension accrual will be based on the average income earned over those 10 years until they retire at 55. At this stage does Individual A get:

1. 20k plus 60k lump sum until the age of 60 and then a pension rise with the additional 10 years of average earnings and possibly another lump sum. Or:

2. Absolutely nothing until aged 60 and then a split pension based on the 20k preserved and 10 years average pay. Or:

3. As per 2 but paid straight from the age of 55.

Any offers or guesses. Of course depending on the date the new rules kick in, could we also see someone reach 55 and retire a month before that date under the current T’s and C’s that we are familiar with, followed by the guy who reaches 55 one month later and gets absolutely nothing till they are 60? Or am I missing something here?
:confused:

[Willard Whyte]

Right now, I'll be glad to avoid all three redundancy tranches.

Mrs WW needs more shoes, so she says.

[Al R]

PA,

The one good thing about Hutton's review is that he has smashed the myth that the pension for most servicemen and woman is 'gold plated'. All that needs to happen now is to expose the rubbish that it is non contributory. I never paid much attention to 'the pension' and I wish I had done far earlier. Seeing in black and white was I really was contributing, and what was being contributed on my behalf, would have probably compelled me to investigate any shortcoming far earlier.

In response to your questions, my understanding is, if Individual A decided to see out his/her final 10 years, and if we see some form of change in 4 years, then there will be 6 years or so of service under the new scheme. Assuming its the case, there will be 6 years benefits that will be applied to whatever the new scheme dictates (ie; later taking of benefits). My instinct tells me that your first scenario is closer to the mark, with benefits being delivered in a more staggered manner. Thats not such 'so' bad; unless you need them (as many will) why have benefits delivered to you earlier, when you might be flying and taxed to buggery on it anyway? Why not wait until you stop earning and your annual allowance is higher (£8200 from next year)? If you haven't already done so, start planning now for what you want your retirement income stream to look like.. the planning process is an evolving one and you won't want to wait until the last minute because you'll have run out of time and options for (planning) change.

Your question about the bloke who waits one month too long (probably!) won't happen because he will have accrued all but one of his 432 months pensionable service under the old scheme rules. He will therefore be entitled to 431 months of benefits as he currently is, and 1 month under the new one. I imagine that there will be a few people banging out before the new scheme kicks in..? When planning retirement, fit AFPS around your life and not vice versa. If you're a woman serving, if you have a husband who is at home raising the kids and has a huge chunk of annual personal allowance that isn't being used, if you have savings currently with a bank savings account that you are being pinged for interest, fill out Form R85 and make sure the interest (ho ho) goes to him. Start getting the basics right first.

http://www.hmrc.gov.uk/forms/r85.pdf

[Exiled]

I think that it is too early to say for sure what will happen to people with service split between old and new schemes, however, the protection of accrued rights should mean that you have the right to retire at 55 with a pension based upon the service you have accrued on the old scheme. What is currently unclear is, what will your entitlement be to the new pension? Although Hutton indicates an early pension age of 60 for the uniformed services we do not know if you will have to serve to that age to get the early pension, as preserved pensions are not likely to be paid until state retirement age.

I would imagine that the most likely scenario is that service after a point, such as the current 18/40 would entitle you to pension aged 60, whilst retirement before this point would leave you with a preserved pension. A great deal depends on the eventual deal which is struck with HMT and I suspect that it may be some years before we will know the answer to that.

[Al R]

If there is to be a lead in period (and we know that there will be, the only doubt is going to be 'how long') it will have to be sufficiently languid in order to avoid financial hardship; no one wants to see ex servicemen caught out on the streets because the goalposts moved. It all counts for nothing if proposals concerning early access to pension savings kick in anyway. Steve Webb (Minister for Pensions) remains a strong advocate of allowing savers to draw up to 25% of their pension fund before age 55 in certain situations (buying a house is one of those scenarios mooted). If that applies to Private Pension provision, there will have to be some parity across the board into public sector pensions; provision might possibly be made to allow members to choose to receive the affected element of their pension earlier, on an actuarially reduced basis perhaps..

But, as you say, no one knows just yet.. I'm just waiting for the pensions ISA. Wait out.

[Party Animal]

Al R - as always, thank you for your professional perspective, which at least provides an element of optimism. Planning for the future is obviously good advice and common sense. One of the big problems now though is that many of us who enjoyed the RAF elected to waive earlier option points with a view to staying to 55. Financial plans, mortgages etc.. were predicated on a certain level of income (including flying pay) up to that point, which for me as a Nimrod directional consultant is now seriously at risk. The spectre of redundancy also means it's impossible to plan for anything over the next few years unless you have a guaranteed job lined up and volunteer to leave. Not sure what pension scheme comes with sales of 'The Big Issue' but it will be an interesting ride between now and then. Cheers anyway.

[Al R]

Busy old week, I thought this might be useful for some. We are coming up to a deadline. Anyone with a self-invested personal pension (SIPP) who is over 55 and coming up for retirement and wants to use income drawdown from their pension fund might want to take advice about starting to take their pension before 6 April. After that date, new G'ment Actuary's Dept (GAD) rules are in place which could affect you. GAD rates are determined by the g'ment and dictate how much cash you can take from your pension. Everyone has a GAD rate allocated to them (an annuitised rate, if you like), which is related to the size of their pension fund. Presently, you can go into overdrive in the early stages of retirement and take 120% of your GAD rate (emergency power, if you like). From 6 April this year however, you can only take 100% of it.

HMRC allows investors to lock themselves into the higher 120% GAD figure for five years at a time by moving the entire amount, or a portion of it, into 'drawdown'. If you do this before 6 April 2011, at any point in the next five years if an investor moves the remainder of their fund into drawdown, the maximum pension will still be worked out using the 120% rate. Check your own scheme rules allow this though. Some might not - some will only allow it with a minimum fund size of, say, £50k (Standard Life, for instance). If you don't elect to use this option now, you'll be liable to the lower annual rate and that might not tie in with your retirement plans (extending the house, taking a dream holiday, new car etc). This is especially relevent to anyone who has a pensionable income of less than £20000, because you'll still have to buy an annuity at 75.

To give an idea of what kind of difference this might make, a male 60-year-old investor going into drawdown before the new tax year with a fund worth £300,000 (after payment of up to 25% tax free cash) may draw a maximum income of £22,320. Anyone going into drawdown after 6 April 2011 will have a maximum income, based on the new GAD tables (an 18% reduction). On the flip side, bear in mind that maximising pension drawdown increases the chances of depleting a pension pot prematurely, but investors with other sources of retirement income such as AFPS often look to take as much as they can out of their pension sooner rather than later.. because invariably, they are able to spend more money in the early years of retirement which may be more enjoyable/expensive/active.

One size doesn't suit all - take qualified advice.

GAD | Government Actuary's Department | Actuarial Services (http://www.gad.gov.uk/)