Pension Horror - Annual Allowance

[Ballistic Profile]

How did this happen?
I’ve just received a letter through the door telling me my ‘Pension Input Amount’ (the first time I have been aware of these three words being used together) is nearly £90000, that the Annual Allowance limit is £40000 and I’m liable for tax on the difference. I’ve had a steady (but far from meteoric) rise through the ranks to OF5 - it’s not as if I’ve been pulling in some tasty six figure bonuses like some in the civilian world.
Is this the same pension trap that is preventing doctors from doing any overtime?
Any advice from the community would be gratefully accepted. Is is best to ‘cough’ for the whole amount in-year or should I accept a permanent reduction to my pension (through this ‘Service Pays’ scheme).
Am I about to face (effectively) big salary reductions for the rest of my career?
Should I press that big PVR button - it might make economic sense?

[downsizer]

Probably a good idea to speak to a clued up IFA pronto.

[dhp41]

How did this happen?
I’ve just received a letter through the door telling me my ‘Pension Input Amount’ (the first time I have been aware of these three words being used together) is nearly £90000, that the Annual Allowance limit is £40000 and I’m liable for tax on the difference.

https://www.gov.uk/tax-on-your-private-pension/annual-allowance

Note that you can carry forward any unused allowance from the past three years:

https://www.gov.uk/guidance/check-if-you-have-unused-annual-allowances-on-your-pension-savings

[VinRouge]

How did this happen?
I’ve just received a letter through the door telling me my ‘Pension Input Amount’ (the first time I have been aware of these three words being used together) is nearly £90000, that the Annual Allowance limit is £40000 and I’m liable for tax on the difference. I’ve had a steady (but far from meteoric) rise through the ranks to OF5 - it’s not as if I’ve been pulling in some tasty six figure bonuses like some in the civilian world.
Is this the same pension trap that is preventing doctors from doing any overtime?
Any advice from the community would be gratefully accepted. Is is best to ‘cough’ for the whole amount in-year or should I accept a permanent reduction to my pension (through this ‘Service Pays’ scheme).
Am I about to face (effectively) big salary reductions for the rest of my career?
Should I press that big PVR button - it might make economic sense?

Out of interest, are HMRC calculating contributions in relation to the supposed personal SCAPE contribution? If so, someone needs to take them to court.

Only solution I found was to cash it in and look at potential part time reserve on my own terms, whilst earning decent Wonga as a civvie. Incidentally, many civvies are getting around tax by emigrating to Portugal (https://nomadcapitalist.com/2016/06/10/zero-income-tax-non-habitual-residence-portugal/) where they have a rather nice little tax deal for 10 years of the date you declare residency. I would live guilt free knowing the truckloads of cash HMG are currently incinerating in Brexit preparations. Won’t be my cash they are using.

[VMD+12]

Join the Forces Pension Society and seek their advice. They are the experts and aware of the challenges.

[Ballistic Profile]

Thank you all so far.
Vin Rouge - I’m not familiar with SCAPE.
It all seems above board - the pack explaining it all has come from the official forces department.
DHP41- yes, the info pack explains I can carry forward unused annual allowances. But they list the years leading up to the ‘trigger’ year and it would seen I’ve been hovering just under that limit for a number of years.
it goes to show, you don’t need to be a 3* to get penalised.
I’m not sure if it was economically sensible to get promoted.

[Lima Juliet]

How did this happen?
I’ve just received a letter through the door telling me my ‘Pension Input Amount’ (the first time I have been aware of these three words being used together) is nearly £90000, that the Annual Allowance limit is £40000 and I’m liable for tax on the difference. I’ve had a steady (but far from meteoric) rise through the ranks to OF5 - it’s not as if I’ve been pulling in some tasty six figure bonuses like some in the civilian world.
Is this the same pension trap that is preventing doctors from doing any overtime?
Any advice from the community would be gratefully accepted. Is is best to ‘cough’ for the whole amount in-year or should I accept a permanent reduction to my pension (through this ‘Service Pays’ scheme).
Am I about to face (effectively) big salary reductions for the rest of my career?
Should I press that big PVR button - it might make economic sense?

Crikey matey, have you been living in a cave? OF-5s have had this for the past 4-5 years and even some OF-4s with odd career profiles and AFPS75/15 pensions too.

Anyway, here is a page of step-by-step info on what to do: https://www.gov.uk/government/publications/step-by-step-guide-for-the-afps-annual-allowance-notification-letter-for-tax-year-201718

Hopefully that helps?

Best, LJ

[ForcesPensionSociety]

MOD have put out a guide too. There is a link in this post:The Society has been helping members deal with the implications of Annual Allowance for some time

The post Annual Allowance (aka the Pension Tax) (https://forcespensionsociety.org/news/annual-allowance-aka-the-pension-tax/) appeared first on Forces Pension Society (https://forcespensionsociety.org/).

[Saintsman]

Perhaps I have misunderstood, but the annual pension allowance is £40K and you are paying in £90K per year?

I don't even get £40K per year, never mind paying that into a pension.

[1.3VStall]

What the **** are OF4s and OF5s? Can someone please equate that to military ranks? This is, after all, a military forum!

[NutLoose]

https://en.wikipedia.org/wiki/RAF_officer_ranks

[Bob Viking]

With the greatest of respect, those currently serving in the military know (or certainly should do) what OF and OR ranks refer to.

As annoying as it may seem it is actually a very easy way to establish rank equivalence across services and nations.

BV

[flyingorthopod]

This issue has been hugely significant for docs for some time. I've had large bills for the last three years.

Get advice for your situation from a good ifa.

Run the figures through the calculator and see what comes out once your previous years have been taken in to account.

Scheme pays is generally the best option as it reduces your lifetime allowance tax liability and the reduction in pension will reduce your income tax liability once your pension starts. This of course makes the maths too complex for me.

Adding the numbers to a self assessment tax return is straightforward but I would suggest checking them with a hood accountant.

Philosophically I feel happier if I view this as a non contributory pension becoming partly contributary.

This is not just an issue for the very senior. People have had tax letters on promoting to cpl.

[Just This Once...]

Crikey matey, have you been living in a cave? OF-5s have had this for the past 4-5 years and even some OF-4s with odd career profiles and AFPS75/15 pensions too.

Anyway, here is a page of step-by-step info on what to do: https://www.gov.uk/government/publications/step-by-step-guide-for-the-afps-annual-allowance-notification-letter-for-tax-year-201718

Hopefully that helps?

Best, LJ

Some OF3s plus some SNCOs & NCA have been pulled into this debacle. The FPS have moved from their old position of helping the individual manage the changes to actively campaigning against it.

I am stunned that anyone above OF4 has not been aware of it or even stung by it already.

Leaving early made the most sense for me. Being taxed on an imaginary future gain figure that your government employer has put into an imaginary pot in imaginary years and being treated like someone trying to reduce tax liability by injecting cash into a pension is just plain bonkers. Applying it to military personnel that may be tied to a RoS, so may not be able to leave and are clearly unable to adjust their virtual non-contributory pension is madness. But here we are, a few years into this creative tax burden and no change of direction from the Treasury. Indeed, the threshold keeps being lowered year-on-year to bring more people into the net.

[VinRouge]

Some OF3s plus some SNCOs & NCA have been pulled into this debacle. The FPS have moved from their old position of helping the individual manage the changes to actively campaigning against it.

I am stunned that anyone above OF4 has not been aware of it or even stung by it already.

Leaving early made the most sense for me. Being taxed on an imaginary future gain figure that your government employer has put into an imaginary pot in imaginary years and being treated like someone trying to reduce tax liability by injecting cash into a pension is just plain bonkers. Applying it to military personnel that may be tied to a RoS, so may not be able to leave and are clearly unable to adjust their virtual non-contributory pension is madness. But here we are, a few years into this creative tax burden and no change of direction from the Treasury. Indeed, the threshold keeps being lowered year-on-year to bring more people into the net.
Not to mention the f@ckers can mess round with the contributory rate at the strike of key press. As you say, TOS and pension points ties you in. Unlike a civilian pension, THERE IS NO POT! SCAPE Pays for current beneficiaries, so in effect you are paying tax on something someone else is benefitting from. I decided like many of my peers that bailing and becoming one of the people being paid, instead of being taxed, makes more sense. My projection for civilian pot plus SIPP to make up the annual allowance will easily match what I would have gotten via AFPS75. Not to mention any potential future change to current schemes.

[Lima Juliet]

VinRouge

To get the AFPS15 return at age 60 as a Sqn Ldr PAS or Wg Cdr you would need to invest ~£3,500/month after tax - that is about £5k/month before tax. So, if you invest £42k a year you will be busting your annual allowance and also bust your lifetime allowance by ~£500k. So I’m not sure where you get your figures from? I got mine by using the Standard Life Pension Calculator: https://www.standardlife.co.uk/c1/pensions-and-retirement/saving-for-retirement/pension-calculator.page

AFPS75, AFPS05 and AFPS15 are bloody good pensions and it is one of the main things that people hang around for as a remunerative measure. Can you share how you think your civvy pension pot will be any better or more tax efficient than anyone on AFPS?

[MG]

What the **** are OF4s and OF5s? Can someone please equate that to military ranks? This is, after all, a military forum!

You’re right and, as such, he’s used military ranks. Not his fault you can’t keep up.

[VinRouge]

VinRouge

To get the AFPS15 return at age 60 as a Sqn Ldr PAS or Wg Cdr you would need to invest ~£3,500/month after tax - that is about £5k/month before tax. So, if you invest £42k a year you will be busting your annual allowance and also bust your lifetime allowance by ~£500k. So I’m not sure where you get your figures from? I got mine by using the Standard Life Pension Calculator: https://www.standardlife.co.uk/c1/pensions-and-retirement/saving-for-retirement/pension-calculator.page

AFPS75, AFPS05 and AFPS15 are bloody good pensions and it is one of the main things that people hang around for as a remunerative measure. Can you share how you think your civvy pension pot will be any better or more tax efficient than anyone on AFPS?

Because my civilian pot is real and cannot be changed on a political whim.

The military one can, has been and looks as though it very well could get fiddled with again in the future.

There is no personal military pot. They have already changed the discount rate used within the past 2 years, making it even more unaffordable for MoD who have to fund it. Why was that, and what are the figures for a gash shag line pilot not SO1? And what percentage of the OF5 salary is 90k contribution? Sounds to me they have made a non contributory scheme very much so through the back door.

[Lima Juliet]

VinRouge

How much for ‘a gash shag line pilot’ - well seeing as they would be on PAS Level 30 which is around £80k/year pensionable at age 50(ish) onwards then the figures will be pretty similar. The NCA MAcrs also mentioned, when on PAS which over 95% are, are also at Level 20 PAS when they top out, which is again ~£68k. That is why they may get a pension tax bill - they are borderline and it depends on personal circumstances if you tip over.

As for the AFPS, it is written in UK Law and what you have owned so far is protected by that Law. They cannot change what you have earned, but they can change the pension scheme in the future (within certain bounds - read on). Although, as we have seen in the McCloud case you cannot forcibly change peoples’ pension schemes and only have an Offer To Transfer (like we did for AFPS05). Standby for more news on what that might mean, but it is legal fact that the Government unlawfully moved us all onto a different pension scheme - https://www.ft.com/content/10be07ee-a717-11e9-984c-fac8325aaa04 and https://forcespensionsociety.org/news/public-sector-pension-ruling-and-the-armed-forces/ for further info.

Yes, you are correct, there isn’t a ‘pot’ but there is a notional pot, which is where the SCAPE rate comes from. Further, AFPS is a promise written in Law and is like an IOU from the Government or a Bank of England Bank Note - the one that has a written guarantee that states “I PROMISE TO PAY THE BEARER ON DEMAND THE SUM OF ...”


https://cimg4.ibsrv.net/gimg/pprune.org-vbulletin/960x480/image_d23342ad90823f659c3812bacc10a2e69b962bc1.jpeg


So, I feel you may have made a very unsound decision if you left because you thought that pensions would be better in civilian life - the only way they would be better would be if you were paid about 60% more than your pensionable salary was in the Service.

[Ballistic Profile]

Some good advice. Thank you.
flyingorthopod - thank you for the advice on scheme pays.
I know that every situation will be different but does anyone have any experience of paying the tax bill each year? How much is it going to cost me to serve until 60?

[Lima Juliet]

Ballistic Profile

Have a read of this chum, it might help explain some more for you: https://forcespensionsociety.org/news/it-cant-possibly-be-right-can-it/

The really good advice is this bit:

Q. Many people say it is not worth me being promoted because of this!

A. You will always be better off as a result of promotion. We have had people talk about leaving the services to avoid the charge, opting out of the scheme or joining a different scheme. None of these are particularly good ideas. Someone who is promoted, and breaches, and pays a tax charge, will be better off financially than someone who does none of those things. What I say to people is it’s like joining the services and saying “I will stay as a corporal throughout my entire career because by doing so I will never pay tax at 40% – that’ll show ‘em!” Besides, if you leave to avoid this you will almost certainly have to take up some other career with a pension scheme which will be also subjected to annual allowance – it does not just apply exclusively to the Armed Forces!

[ForcesPensionSociety]

What the **** are OF4s and OF5s? Can someone please equate that to military ranks? This is, after all, a military forum!

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/771383/20180331-Keytorankcode2018.pdf

[VinRouge]

VinRouge

So, I feel you may have made a very unsound decision if you left because you thought that pensions would be better in civilian life - the only way they would be better would be if you were paid about 60% more than your pensionable salary was in the Service.
Of course that decision wasn’t purely based upon a single metric, life is never that simple. However, the taste of the Kool Aid we were getting fed, together with the bitter taste that was left after the seniors who had the moral duty to resign over the AFPS15 change, instead decided to sign up to grandfather rights looking after them and their own was a major factor. It came across somewhat as the seniors getting their bellies tickled and damn the rest of us.

So was the lack of a pay rise for a decade, as well as Royal protections removed from AFPS when the 15 change happened pretty much was a final nail in the coffin.

Since then, the discount rate has been changed, with impacts to the affordability of the scheme. And whilst you are right, they can’t take away accrued benefits, being part of a scheme that doesn’t permit you to realise those benefits until you have served a defined period on a significantly deteriorated accrual rate, through either TOS or pension point is downright unfair in the extreme. A fair way of dealing with the situation would have been to allow personnel to exit prior to IPP, but not pay out until the same time frame to IPP thereby allowing accrual externally whilst preserving pension rights for what was earned. Was that even considered? Nope. But I bet MoD/HMG wouldn’t now be in the dwang they are reference grandfather rights if they had. Would also be very interested to see what % of salary 90K is for an OF5 though.

[Ballistic Profile]

VR - I can tell you, it’s more than 100%.
However, this £90k figure is my Pension Input Amount - ie what an actuary has estimated my notional input to a pension pot would be to generate the change in my predicted pension (over the last year).
i don’t yet know what the tax is that I’ll have to pay due to my ‘error’ of paying into my notional pot more than the £40k allowance.
Anyone know what I might be about to be shaken down for?

[alfred_the_great]

VR - I can tell you, it’s more than 100%.
However, this £90k figure is my Pension Input Amount - ie what an actuary has estimated my notional input to a pension pot would be to generate the change in my predicted pension (over the last year).
i don’t yet know what the tax is that I’ll have to pay due to my ‘error’ of paying into my notional pot more than the £40k allowance.
Anyone know what I might be about to be shaken down for?

you should have a letter, and an annex. In the annex, do the sums, and then you’ll find out how much.

I am genuinely surprised that this is the first time it’s happened to you.

[Melchett01]

I’ve just had a letter too. Ran it through the calculator and it looks like I’m being stung for in excess of 10k tax bill. I suspect many heard the expletives in the next county.

I owe this for doing nothing other than going to work and doing my job. I have no control over pay, hours worked or pension inputs. As an accidental OF4, I’m hardly up in the fat cat stakes the government intended to stop manipulating the pensions system. Cross doesn’t start to describe it.

I was aware of the issue, especially that OF4 is a vulnerable rank, but got onto FPS pretty pronto as this isn’t something you can plan your way out of. But when the literature implies a broadly linear increase to your pension - every pamphlet / briefing I’ve seen has said it goes up in line with salary and time served - I was stunned to see that the PIA is anything but linear. One year the govt put 5k into my pension and then last year in excess of 100k which has caused the problems. Other issues surround how to pay. If you pay up front and the govt changes the rules in 18 months you’ve just spanked a lot of money. But if you go down the scheme pays route and they treat it as a loan - I believe that is how it works for the NHS Scheme Pays rules - you end up paying interest on the loan, a loan which you’ve never actually had the benefit from.

Its a mess, and it will get worse if we all go back to 75 Scheme in a few years and we get another lump sum thrown at pensions as reparation. But hey, numbers are boyuant, morale’s good and the PVR rate tiny. What’s to worry about?!

[Professor Plum]

Vin Rouge

Your posts on this thread echo my thoughts ref AFPS.

It's possible as a Pilot, to earn large sums outside the mob, that enable you to put a significant amount of money into a workplace pension/SIPP that IMHO can rival the AFPS. I'm not saying AFPS is a bad scheme, but with the current job market It's possible to earn large sums outside the mob.

A "Gash Shag" airline Captain starting salary is circa 125K all in (that's from a good mate - ex Mil aged 40, now decent LoCo Captain who left 3.5 years ago and has just got Captaincy). The Military Flt Lt equivalent will be on less than 80K. He will most likely be a QFI/QWI etc etc etc. An airline equivalent (LTC/TRI/TRE) will be on more than the 125K above. He will also get paid extra for any other additional duties.

Now hypothetically speaking…..

The airline Captain has company pension contributions of 10% (so 12.5K). He chooses to max out his 40K annual allowance and contributes 27.5K (don't forget pension tax relief). His taxable salary is then just under 100K which makes sound financial sense keeping his taxable salary below 100K for income tax purposes. The difference in PAS vs airline salary after contributions is circa 20K - which can be spent as he sees fit.

I've not included contributions as an FO. Equally, I've used 20 years of contributions to keep things simple. Someone leaving age 40 could potentially work for up to 25 years. Again, I've also not included greater contributions (albeit with a tax hit) as a TRI/TRE etc.

20 years of contributions in this example gives an 800K pension pot. This will be in workplace pensions/a SIPP which provides diversification and flexibility that AFPS does not give.

Apologies for a long post. What I was going to ask is does anyone know how to work out how the AFPS contributions made on my behalf compare to my lifetime limit? I just went off on a bit of a tangent....

If anyone sees any flaw's with my calculations... then please shout!

[VinRouge]

Prof Plum, plus an additional point. 20k+ pay rise from the day you leave (including the pension you won’t get if you stay in) and a salary that won’t top out at Pay Point 30 on PA. Which barely matches the salary you start on as an FO from day one of leaving. The ability to deleverage earlier on in your career, through downpayment of the mortgage and overall quality of life increase from better salary also needs to be accounted for. No point enjoying a decent income at 90 with pea soup dribbling down my toothless grin.

[wokkamate]

What the **** are OF4s and OF5s? Can someone please equate that to military ranks? This is, after all, a military forum!

OF4 = Wg Cdr / Lt Col
OF5 = Gp Capt / Col
etc etc

[liverpooleyesurgeon]

I nearly got caught in this but was of an age that I could retire and return. The calculation is so complex that you almost need someone with a degree in maths to understand. One year, the calculation showed that I had contributed more than I had earned. I had applied and obtain a discretionary point for providing a service above my basic work. I also moved one step up the salary scale. The contribution into the pension involves something like the difference between last years salary and this year multiplied by 16. This is then added to your own and employers pension contributions. You then pay tax on the pension contribution above £40k. The things that have also caught people especially medics is taper rules. Your salary before tax including your pension contributions plus your employers pension contributions is your total rewards package. Once this goes above £110K (I think) then the amount you can contribute into your pension tapers from £40K. If you are lucky enough to have a total rewards package above £210K then the max you can put into a pension is £10K and you get taxed on contributions above these figures (55%) The problem is that you do not find out the contribution until October of the following tax year! A good IFA is vital.
This is why the NHS is in a mess and needs expensive locums (as reported in the papers today). The vast majority of my Consultant colleagues do not do extra paid work and are asking to reduce the hours they work

[Lima Juliet]

Professor Plum

What I was going to ask is does anyone know how to work out how the AFPS contributions made on my behalf compare to my lifetime limit? I just went off on a bit of a tangent....

I think you are asking what pension contributions you would need to make to get a similar work-place pension? If so, the Govt Actuaries Dept (GAD) believe that to be 63.5% of your basic Service pay. If you were asking how much you have notionally paid in for Life Time Allowance (LTA) then Service personnel get an annual statement with that on these days. However, if you have left then you could ask Equinity, who took over from HM Paymaster some years back, and they can tell you what your LTA amount is.

The one flaw I would pick in your calcs for the comparison is that at 63.5% of your basic pay, then the PAS Flt Lt on say £70k per year is actually getting a ‘package’ of ~£114.5k - as 63.5% of basic pay is ~£44.5k which is your notional pension contribution. Most Flt Lts that transfer to PAS at their 20/40 point, with the new RRP(F) in payment, will transfer to PAS Level 22 which is £70.5k. They will then go up each year as Flt Lts until PAS Level 30 which is currently £80k, which with the same pension amounts adds up to £130.8k. Now that isn’t that far off the sorts of numbers you have been talking for airline salaries. Honestly, if people are leaving the Services solely for pay reasons, unless they are able to take home more than £120-£150k a year, then they are really not thinking it through in my humble opinion. We haven’t even got to the other bits of the Armed Forces’ package yet either - cheap SFA, CEA education allowance, Home to Duty, free medical and dental, separation allowance, etc...etc...

Now if you want to sell your soul and live in the Middle East in a compound for a few years to get £200k+ per annum, then that is a totally different ball game. But they pay you that much for a reason!

[Lima Juliet]

VinRouge

No point enjoying a decent income at 90 with pea soup dribbling down my toothless grin.

Agreed, but you can leave at 55 with an EDP and have 25 years of reasonable health until it starts to go downhill a bit in your 80s. You don’t have to go full term to enjoy the benefits :ok:

[drugsdontwork]

Professor Plum



I think you are asking what pension contributions you would need to make to get a similar work-place pension? If so, the Govt Actuaries Dept (GAD) believe that to be 63.5% of your basic Service pay. If you were asking how much you have notionally paid in for Life Time Allowance (LTA) then Service personnel get an annual statement with that on these days. However, if you have left then you could ask Equinity, who took over from HM Paymaster some years back, and they can tell you what your LTA amount is.

The one flaw I would pick in your calcs for the comparison is that at 63.5% of your basic pay, then the PAS Flt Lt on say £70k per year is actually getting a ‘package’ of ~£114.5k - as 63.5% of basic pay is ~£44.5k which is your notional pension contribution. Most Flt Lts that transfer to PAS at their 20/40 point, with the new RRP(F) in payment, will transfer to PAS Level 22 which is £70.5k. They will then go up each year as Flt Lts until PAS Level 30 which is currently £80k, which with the same pension amounts adds up to £130.8k. Now that isn’t that far off the sorts of numbers you have been talking for airline salaries. Honestly, if people are leaving the Services solely for pay reasons, unless they are able to take home more than £120-£150k a year, then they are really not thinking it through in my humble opinion. We haven’t even got to the other bits of the Armed Forces’ package yet either - cheap SFA, CEA education allowance, Home to Duty, free medical and dental, separation allowance, etc...etc...

Now if you want to sell your soul and live in the Middle East in a compound for a few years to get £200k+ per annum, then that is a totally different ball game. But they pay you that much for a reason!

i think a few people might have left so they didn’t have to sell their soul in a Middle East compound for a good deal less than £200k.

[VinRouge]

LJ,

Please can you explain the rather significant jump in pensions contribution, as a % of pay that seems to have happened in the past 12 months? Are people all of a sudden getting vastly larger payouts on retirement? Has the AFPS calculator lined everyone’s post 55 driveway in gold? Can we all now afford a yacht?

Or has there been a change in assumption that is cynically screwing current serving personnel and turning it into a de facto contributory scheme via the back door? The figures pushed out as recently as last year were around the 45% of salary mark. Latest quote from official stats is now over 70% for officers. So what has changed? Why do we now have wing commanders receiving over 100% of their pay into their (imaginary) AFPS pension pots?

[drugsdontwork]

LJ,

Please can you explain the rather significant jump in actuarial pensions contribution, as a % of pay that seems to have happened in the past 12 months? Are people all of a sudden getting vastly larger payouts on retirement? Has the AFPS calculator lined everyone’s driveway in gold? Can we all now afford a Nic 55 yacht, name it Rio Grande and drink cocktails in the Caribbean on retirement?

or has there been a change in assumption that is cynically screwing current serving personnel and turning it into a de facto contributory scheme via the back door? The figures pushed out by manning as recently as last year were around the 45% mark. Latest quote from official stats is now over 70% for officers. So what has changed? Why do we now have wing commanders receiving over 100% of their pay into their (imaginary) AFPS pension pots?

Surely everyone in the military is exceeding their annual allowance then? Why are only some people taking a hit?

[Lima Juliet]

VinRouge

I think I have an explanation for both. Firstly, the ‘pension pot’ to which you refer. It isn’t really a ‘pot’ as you have correctly pointed out, it’s more of an IOU from HM Treasury. The scheme is written into UK Law and as we have agreed the pension that you have earned cannot be changed (and as we have learned in the McCloud case it cannot be unreasonably enforced for change without the consent of the scheme member - so AFPS15 should have been an offer to transfer for existing members like it was for AFPS05). There are millions of Govt IOUs in circulation right now, not for pensions but for payments - the Pound Sterling bank note. Have a look at one, in itself worth nothing, but the magical words of “I PROMISE TO PAY THE BEARER THE SUM OF”. This promise is backed by the Bank of England (or regional variations) and is in effect the same as our pensions - the UK promises to pay us the amount we have earned under the scheme underwritten in UK Law. I can remember talking to a Financial Advisor in the Mess in the very early 90s when I was a Pilot Officer, asking him what the Armed Forces Pension was - his answer was one of the best non-contributory pensions you can have and unless the country goes totally ‘belly up’ then they have to pay you (by ‘belly up’ we are looking at a significant hostile takeover by communists or the country going totally bankrupt - both unlikely).

When it comes to the 63.5%, it will vary as it is trying to map AN EQUIVALENT PRIVATE PENSION to the Armed Forces Pension Schemes. So every few years the Government Actuary Department (GAD) value what our pension would cost using several stable private pension schemes (the usual suspects and not the high-risk ones). They then come to a figure of what that would cost the individual if they were to buy that pension as a percentage of your basic pensionable salary (ie. excluding RRP(F), HTD, LSA, etc...). That figure is published as the SCAPE rate and a link follows on the latest valuation done in Mar 19 that is good for the next few years. The last time it was done it, I think in 2016, it was 51.5%.

Here is a link to the latest valuation: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/792432/AFPS_2016_actuarial_valuation_report_final_28_Feb_2019.pdf

So that’s it, it can be valued and seen as a ‘virtual pot’, but to challenge it you would have to find flaws in the GAD’s independent processes (good luck with that!) or just accept it is about right by running one of the many pension calculators for private pension schemes - that is what I did and decided it was about right.

[VinRouge]

https://cimg4.ibsrv.net/gimg/pprune.org-vbulletin/640x281/da039ab8_0ae3_42c9_8a90_122d16f8e763_41adf74d23899a624993426 7eb2e7874f7e50ce3.jpeg
The GAD increased the contributions figure in 2016 for officers from 52.4% up to 63.5%. That is a pretty hefty increase mindful of the nil change to benefits.

some background here.

https://commonslibrary.parliament.uk/economy-business/work-incomes/public-service-pensions-less-for-more/

[Lima Juliet]

Surely everyone in the military is exceeding their annual allowance then? Why are only some people taking a hit?

You are only taxed if your notional pension contribution goes above £40k. So your basic pay would need to be ~£64k to be above the threshold where you might pay. But there are also many variables to this that mean that some do and some don’t - such as the ‘opening value vs closing value’ calculation (this favours those that take longer to promote). I don’t fully understand it myself, but if your salary in the military starts to approach the mid-high £60ks then you start to be at risk of getting a bill (normally on promotion).

I hope that makes sense? It’s a complex area that I haven’t got my head fully around as I have never had a bill (although I must be close!).

[Lima Juliet]

https://cimg4.ibsrv.net/gimg/pprune.org-vbulletin/640x281/da039ab8_0ae3_42c9_8a90_122d16f8e763_41adf74d23899a624993426 7eb2e7874f7e50ce3.jpeg
The GAD increased the contributions figure in 2016 for officers from 52.4% up to 63.5%. That is a pretty hefty increase mindful of the nil change to benefits.

some background here.

https://commonslibrary.parliament.uk/economy-business/work-incomes/public-service-pensions-less-for-more/

You’re missing the point VinRouge . It is not about what the pension will pay you, it is what the pension will COST YOU. So if the private pension market performance is poor (which it is), then the valuation of what the AFPS would cost the Service person will increase. It’s not about what it pays you, it’s about what it would cost you.

[VinRouge]

You’re missing the point VinRouge . It is not about what the pension will pay you, it is what the pension will COST YOU. So if the private pension market performance is poor (which it is), then the valuation of what the AFPS would cost the Service person will increase. It’s not about what it pays you, it’s about what it would cost you.

It depends upon risk appetite and what you do with your pot. SIPP, balance of
risk etc. I know most who have hit but not exceeded annual limits and with the flexibility of their own provision and taking advice, have done far, far better than the “average”, which is a pretty poor use of your money. Again, HMG increasingly seem to be able to set whatever contribution rate they like (with advice from GAD), it then becomes a pseudo income stream when the Personal Allowance is accounted for.

It’s a bit like comparing the NAFFI Spar price for Jaffa cakes compared to what you can get them for in Tesco. Except you don’t get a choice.

[Lima Juliet]

But isn’t that the point VinRouge - there is no risk with AFPS (apart from some sort of armageddon) whereas even with the most stable private plans there is always risk of collapse. Ask Mrs LJ, her private pension pot, in a low risk private pension scheme, was roughly £0.5M prior to 2007, it is now worth less than £0.2M. Whereas, my AFPS was totally unaffected by the various market crashes (save for the auto enrolment onto AFPS15, although I am better off on that as I get the ability to earn pension past 55 now that I didn’t on AFPS75).

[VinRouge]

But isn’t that the point VinRouge - there is no risk with AFPS (apart from some sort of armageddon) whereas even with the most stable private plans there is always risk of collapse. Ask Mrs LJ, her private pension pot, in a low risk private pension scheme, was roughly £0.5M prior to 2007, it is now worth less than £0.2M. Whereas, my AFPS was totally unaffected by the various market crashes (save for the auto enrolment onto AFPS15, although I am better off on that as I get the ability to earn pension past 55 now that I didn’t on AFPS75).

AFPS 15 cost me and many in my generation over 1/3 of the original promise. And whilst we were unable to touch the pension and had to serve the remainder of the time on a scheme with a far lower accrual, it’s snake oil sales tactics to suggest we didn’t lose anything. That change cost my pension in the region of 100k, not accounting for CPI increases.

People are now being taxed on contributions to the scheme despite not having an actual pot. It’s the flip side to the same coin.

The key key point is diversification across assets and not putting eggs in one basket, with differing levels of risk in the pot.

[Professor Plum]

Vin Rouge / L J,

Just so my thinking is correct......

A workplace pension/SIPP etc sees money invested-and at the end, you get what you get depending on how your “pot” performs.

AFPS works backwards-your return is guaranteed, and the GAD works out what it thinks you should pay in (to a civilian equivalent) to receive the guaranteed return.

If so-then the GAD must be assuming a pretty poor performing “fund” if it thinks contributions need to be that high. What growth assumptions are behind the SCAPE contributions? If its none, or just a few percent, then no wonder the contributions are so high. I would expect a healthy couple of percent above inflation from any invested pension pot. Is SCAPE simply writing an IOU for a modest amount of interest up front and putting that in the IOU pot for later?

The benefits of compound interest can be huge over time on any workplace pension/SIPP. Just two % above inflation will see any pot of money double in 35 years, or 3% about will double in just over 20.

Diversifying your portfolio in a SIPP spreads risk and allows you to “take the rough with the smooth” especially if you have time on your side. I totally get that the AFPS is risk free (save armageddon) though.

LJ-hope Mrs LJ’s pot enjoys better luck soon.

Regarding my Lifetime allowance in your response to my post the other day-I did recently receive my annual pension statement. It had my “ value of your benefit against LTA limit” down as “0” which I’m pretty sure is incorrect.

[Lima Juliet]

AFPS 15 cost me and many in my generation over 1/3 of the original promise. And whilst we were unable to touch the pension and had to serve the remainder of the time on a scheme with a far lower accrual, it’s snake oil sales tactics to suggest we didn’t lose anything. That change cost my pension in the region of 100k, not accounting for CPI increases.

That is what the McCloud case is all about. There may well be some rebate of what you think you have lost. I suggest you follow the case with interest (it will take a couple of years!).

Professor Plum

This is what the recent valuation report stated on CPI in the report I linked to a few posts up from April 19:

” The SCAPE discount rate has been updated to reflect these changes and was reduced from 3.0% pa above CPI to 2.8% pa above CPI from April 2016 to April 2019 and was subsequently reduced to 2.4% pa above CPI. ”

[Professor Plum]

LJ,

Thanks. I should’ve read the link instead of being lazy!

:ok:

[VinRouge]

LJ,

Thanks. I should’ve read the link instead of being lazy!

:ok:
It’s currently 0.1% above CPI. It was cut (significantly) over the past few years. One of the reasons it now appears as though our contributions are a much bigger % of our salary as I understand it.

https://cimg8.ibsrv.net/gimg/pprune.org-vbulletin/640x156/6737b0b5_b61f_47a0_a283_2358bd9af6fa_5cf08e00431b88cd4e80ea7 4febb8980e2b41d5d.jpeg

[ForcesPensionSociety]

In the House of Lords on the 15 October our Vice President, Marshal of the Royal Air Force Lord Craig of Radley GCB OBE spoke about the effect of Annual Allowance on Forces personnel.

The post Annual Allowance in the House of Lords (https://forcespensionsociety.org/news/annual-allowance-in-the-house-of-lords/) appeared first on Forces Pension Society (https://forcespensionsociety.org/).

[Ballistic Profile]

I can’t post the URL because I’m a Newb, but the BBC online are running a story that the NHS is to pay the in-year pension tax bills for doctors in order to encourage them back to work.

i wonder if this will be replicated across the public sector? I wonder if our Senior Leadership has the courage to press the Treasury in the same way.

if not, I’ll be writing a £10000 cheque next month. No Christmas for me.

[Easy Street]

I’ll be writing a £10000 cheque next month. No Christmas for me.

That would be your choice, as there is an established Scheme Pays option which takes the tax (plus interest) out of your pension ‘pot’. It doesn’t (yet...?) get reimbursed at retirement as this emergency NHS measure reportedly does, but it is still the choice of many.

Personally, I would sooner have £10,000 available now to enjoy Christmas with a young (ish) family than have a few hundred extra pounds to spend in each year of my dotage. But each to their own. I also take the view that cash payments would be harder to claw back should it ever be decided at some point in future that this whole episode was the result of an unfortunate oversight by those who introduced the changes, whereas notional pension pots could be restored at the click of a keyboard without the inconvenience of finding ready cash...

[Sandy Parts]

Useful 'scheme pays' summary here - https://forcespensionsociety.org/news/annual-allowance-aa-scheme-pays/

[PARALLEL TRACK]

Useful 'scheme pays' summary here - https://forcespensionsociety.org/news/annual-allowance-aa-scheme-pays/

the article doesn’t mention AFPS 05, is that because of EDPs?

[ForcesPensionSociety]

EDP is not considered during AA PIA calculations and is not relevant in this context. The principle of CPI growth on any 15 pension AA debt applies equally whether the example is AFPS 15/75 or AFPS 15/05.

[hippocrates]

Uniformed Medical Officers warned of this affecting them years ago.
They were ignored and essentially told to suck it up, 'you don't you know how lucky you are'.

Uniformed Medical Officers warned of this affecting you years ago.
They were ignored.

Uniformed Medical Officers are leaving because of this.
They are being ignored.

There is no plan to implement the very specific NHS suggestion to Defence that we have been told about. I would suspect the NHS solution to be challenged in the courts by those in the same scheme with bills but that don't happen to be Doctors.

This has been a cluster from the start but sadly NO ONE LISTENED TO THE 'OVERPAID DOCTORS BLEATING'.
Sorry, forgot to say that that phrase was used too.

End of rant.

[Sandy Parts]

[QUOTE=VinRouge;10593249]https://cimg4.ibsrv.net/gimg/pprune.org-vbulletin/640x281/da039ab8_0ae3_42c9_8a90_122d16f8e763_41adf74d23899a624993426 7eb2e7874f7e50ce3.jpeg
Re the above - about this time of year I chuck some coppers into my SIPP to recoup some of that 41% (Scottish resident) tax. To guess how much I can bung in, I need to know where I am in regard to the 40k Annual Allowance for FY19/20. I'm guessing I can roughly multiply my pensionable pay x 63.5% to get that figure. The question is, what constitutes 'pensionable pay' in this instance? Is it net income or gross inc NI or gross minus NI? No info on the interweb that I can find. Emailed JPAC / Veterans UK for a detailed quote but nothing heard back yet....

[Countdown begins]

A couple of pals were briefed by Simone at Wycombe recently. This only affects 75 and 15, because before age 55 you’re looking at an EDP not a pension. Lots of facts and figs, but if you are going to get hit by this it is normally after a promotion. It then goes away. Don’t ask me why, but Wg Cdrs on flying pay, not PAS aren’t getting these letters.

[Sandy Parts]

A couple of pals were briefed by Simone at Wycombe recently. This only affects 75 and 15, because before age 55 you’re looking at an EDP not a pension. Lots of facts and figs, but if you are going to get hit by this it is normally after a promotion. It then goes away. Don’t ask me why, but Wg Cdrs on flying pay, not PAS aren’t getting these letters.

Flying pay certainly isn't 'pensionable pay' so that might be the reason. (Not looked at pay scales for Wg Cdrs - I know my limits :})

[Sandy Parts]

fprince - will let you know if I hear from VeteransUK Pensions division - email sent and acknowledged last week (asked for more info so that is promising). I've been adding to a SIPP for about 10 years but I am now very cautious about hitting the 40k max (including the 'virtual' AFPS contribution). Frustrating when we are trying to 'plan for the future' as per the govt's advice...

[finningleyprince]

SP, many thanks for that, there are quite a few in one of the Whatsapp groups that are concentrating on this. I've recently asked my B&TA, who has a pretty good handle on all things finance, so if he says he doesn't fully understand it, then it's time for the paid experts. I did read yesterday, on one site, that it's common to receive the letter after a promotion, or at a pension point? I don't know where PAS fits into this, as it's circa £1100 each year. What this does do is focus my mind acutely to my PP, as whilst it's been said above that you will always be better off in our scheme, it takes away the 40% tax present that is so rare to find these days! Perhaps VR or ADC is the way ahead?! OR I could just retire as I've spent 33 years planning for!!

Just out of interest did the SoS for Defence say during the election it was one of things he wanted to sort, after he sorts the pipeline (RAF), ship availability and army recruitment?!!

[Sandy Parts]

FP - PM'd you. For others interested, the figure I've been given (2018/19) works out at about 48% of my net pay. I'll be using the new '63%' rate (see articles above) of my net wage to guess this years 'contribution' and then top-up SIPP but keeping below 40k total contributions. Not having live data for current year isn't ideal when you can't retrospectively add to your SIPP to maximise your pension (as the govt says it encourages us to do....).

[hunterboy]

When the civvy pilots went along and protested to various government officials about the effect of this made up tax, we were informed that it was no accident, and that we, along with middle class professionals were most definitely the target. I’m pleased to say that the chickens are now coming home to roost.

[Easy Street]

Look out! At least the Treasury can’t feign ignorance of the impact of such a change after the publicity around the effect of pension taxes on ‘our NHS’...Sajid Javid contemplates raiding high earners’ pensions in March Budget (https://www.politicshome.com/news/uk/government-and-public-sector/policy-making/news/109752/sajid-javid-contemplates-raiding-high)
... Mr Javid is considering cutting the [pension tax relief] rate, from 40 per cent to 20 per cent, which would raise more than £10bn annually for the Treasury.

[downsizer]

Look out! At least the Treasury can’t feign ignorance of the impact of such a change after the publicity around the effect of pension taxes on ‘our NHS’...Sajid Javid contemplates raiding high earners’ pensions in March Budget (https://www.politicshome.com/news/uk/government-and-public-sector/policy-making/news/109752/sajid-javid-contemplates-raiding-high)

Pretend I'm thick, how would this impact me?

[Easy Street]

Pretend I'm thick, how would this impact me?

If you are already drawing your pension then it won’t. If you are still serving it would double the in-year tax charge levied on you every time a pay increment or promotion added more than £40k to your notional pension pot in one year. When this first became a ‘thing’ a few years ago it only affected gp capts and above (and medics/dentists/lawyers), but it’s already crept down to catch wg cdrs by the threshold not keeping pace with pay. The direction of travel on this looks to be one way so it wouldn’t be a surprise if PA sqn ldrs got caught eventually.

[downsizer]

If you are already drawing your pension then it won’t. If you are still serving it would double the in-year tax charge levied on you every time a pay increment or promotion added more than £40k to your notional pension pot in one year. When this first became a ‘thing’ a few years ago it only affected gp capts and above (and medics/dentists/lawyers), but it’s already crept down to catch wg cdrs by the threshold not keeping pace with pay. The direction of travel on this looks to be one way so it wouldn’t be a surprise if PA sqn ldrs got caught eventually.

Thanks. How do you work out this notional addition to the pension pot?

[Melchett01]

If you are already drawing your pension then it won’t. If you are still serving it would double the in-year tax charge levied on you every time a pay increment or promotion added more than £40k to your notional pension pot in one year. When this first became a ‘thing’ a few years ago it only affected gp capts and above (and medics/dentists/lawyers), but it’s already crept down to catch wg cdrs by the threshold not keeping pace with pay. The direction of travel on this looks to be one way so it wouldn’t be a surprise if PA sqn ldrs got caught eventually.

Not sure about that. The tax charge is related to input amounts not tax relief. As we don’t receive tax relief on our pensions I think this affects private sector and SIPPs more. Where it will create an issue is the perceived increase in pensions apartheid between public and private sector, which will leave your average Torygraph reader frothing at the mouth more than usual.

[finningleyprince]

I will be glad to leave. It's all stacking up against 'average Joe' that doesn't want * rank fame, just a decent pension to retire on, and the sooner the better before waiting for it gets me killed.#

I am guessing that the year you get the letter, which will start to eat up previous years allowances, you have 3 years before that cloud really is over you. It makes my option point a no-brainer. It will be time for the Reserves or a total break!

[finningleyprince]

If you are already drawing your pension then it won’t. If you are still serving it would double the in-year tax charge levied on you every time a pay increment or promotion added more than £40k to your notional pension pot in one year. When this first became a ‘thing’ a few years ago it only affected gp capts and above (and medics/dentists/lawyers), but it’s already crept down to catch wg cdrs by the threshold not keeping pace with pay. The direction of travel on this looks to be one way so it wouldn’t be a surprise if PA sqn ldrs got caught eventually.
PAS Sqn Ldrs are very susceptible to it, as PAS MAcr are thought to be well within the catchment zone. It needs an explanation from the PensPol people now, as it is just not going away and is definitely a push factor.

[Melchett01]

I will be glad to leave. It's all stacking up against 'average Joe' that doesn't want * rank fame, just a decent pension to retire on, and the sooner the better before waiting for it gets me killed.#

I am guessing that the year you get the letter, which will start to eat up previous years allowances, you have 3 years before that cloud really is over you. It makes my option point a no-brainer. It will be time for the Reserves or a total break!

I, along with a couple of friends, have all just received those letters and been faced with 5-figure bills for no reason other than going to work and being reasonably competent over the years.

If that wasn’t bad enough, the advice received was that if we elected to use Scheme Pays, it would be treated like a loan and our pensions would be reduced in perpetuity. Now forgive me if I’m wrong, but that sounds little more than theft. If I take a loan out with my bank, I pay the amount back plus interest and we go out separate ways once the business is concluded. How the Government can legally take money off you for a debt repaid in full years earlier is frankly staggering. So be aware - unless you really do have no choice, look hard at all the options before electing for the legalised theft route.

[Easy Street]

Not sure about that. The tax charge is related to input amounts not tax relief. As we don’t receive tax relief on our pensions I think this affects private sector and SIPPs more. Where it will create an issue is the perceived increase in pensions apartheid between public and private sector, which will leave your average Torygraph reader frothing at the mouth more than usual.

My understanding of the current situation is that we receive relief at 40% for notional pension inputs of up to £40k pa. Logic suggests this is how the Treasury views it because if you exceed the £40k then you incur a tax charge on your surplus inputs, as you have recently discovered with your letter. If the relief rate is halved then I assume that all higher-rate taxpaying service personnel are at risk of tax charges of 20% on their notional input amounts up to the allowance limit, and charges at their marginal tax rate beyond it. (Disclaimer: I’m not an accountant, seek professional advice!) By the way, I think it helps to understand Scheme Pays as an advance, not a loan; if you use it you will have less in your ‘pot’ and so get less pension. I’d still use it, though, as my need for cash is much greater now than it will be in retirement.

The following is aimed at downsizer but hopefully useful to others:

The pension tax charge under discussion on this thread is related to the amount input to a pension each year. As we don’t actually input anything, the Government calculates the notional pension ‘pot’ which a civilian would need to purchase an equivalent pension and raises a charge at your marginal tax rate if the increase in that ‘pot’ during one tax year exceeds the annual allowance. So the calculated ‘input amount’ is not directly related to your current salary. Promotions for people with AFPS75 credit cause large spikes in their future pension benefits when they reach two years in rank, which are turned into large notional annual inputs and attract tax charges.

This is not a change to your pension but a change to the tax regime (which actually dates back several years, but is only now dawning on many). High middle income earners are *squarely* in the taxman’s sights and the reasons why we don’t hear so much about these charges in the private sector are that 1) their pensions are generally rubbish by comparison, or 2) they’ve chosen to take more of their compensation as salary or other benefits (in which case they pay higher- or even top-rate income tax on it).

I think we service personnel (and judges and doctors) have a legitimate grievance in that we cannot choose to take salary instead of pension growth, so are effectively forced into taking interest-bearing ‘Scheme Pays’ advances against our future pension benefits to pay the tax bills. But we are in a weak position politically: people only get a tax charge because they are better off than people who don’t get a tax charge, and they can never be left worse off for it. That means that sympathy is likely to be in short supply in the Treasury and getting ‘Scheme Pays’ made interest-free may be about the best we can hope for - pure speculation on my part.

[Countdown begins]

I, along with a couple of friends, have all just received those letters and been faced with 5-figure bills for no reason other than going to work and being reasonably competent over the years.

If that wasn’t bad enough, the advice received was that if we elected to use Scheme Pays, it would be treated like a loan and our pensions would be reduced in perpetuity. Now forgive me if I’m wrong, but that sounds little more than theft. If I take a loan out with my bank, I pay the amount back plus interest and we go out separate ways once the business is concluded. How the Government can legally take money off you for a debt repaid in full years earlier is frankly staggering. So be aware - unless you really do have no choice, look hard at all the options before electing for the legalised theft route.
Melchett, could I be cheeky and ask a question or two?
Are you on a 75 or 75/15 pension? Have you just gone up a band on PAS?
Easy Street sets out below that it’s not necessarily about the salary but about the rate of increase in pension?
I have heard that several times so I can get my head round that, but not why 05 or 05/15 isn’t too badly hit, if at all. perhaps because it’s not a pension but an EDP? Maybe at the age 55 point people on that will be hit then?
it is a mess, and a 5 digit tax hit is something that will make people think twice.
As an aside the new RRP for pilots, paid after 7 years- is that going to hit guys getting to that point?

[VinRouge]

As an aside the new RRP for pilots, paid after 7 years- is that going to hit guys getting to that point?


RRP, like flying pay, is not pensionable, so no. I suppose if you look at where guys will be entering the Professional Aviator Spine now, then potentially, but immediately there is no effect as RRP is not included in pensionable salary.

[Easy Street]

Easy Street sets out below that it’s not necessarily about the salary but about the rate of increase in pension?
I have heard that several times so I can get my head round that, but not why 05 or 05/15 isn’t too badly hit, if at all. perhaps because it’s not a pension but an EDP? Maybe at the age 55 point people on that will be hit then?

My first thought is that 05 and 15 both work on the principle that your pension is proportional to the average pensionable salary received across your career. A promotion will not make an immediate difference and the value of the pension increases relatively smoothly as your salary increases. Compare that to 75, where your pension is based on your rank at retirement (with a minimum requirement of 2 years in that rank). The effect is that the value of the pension increases significantly 2 years after each promotion. The ability to roll over up to 3 years'-worth of unused allowance helps to smooth this out a little but the liability for tax charges is clearly much greater under 75 or 75/15 than 05 or 05/15.

If we'd known back in 2005 that the annual allowance was going to be slashed just a few years later, many more of us might have taken the offer to switch to 05. That could turn out to have been a very expensive decision in my particular circumstances. I have no idea whether AFPS05/15 'EDPs' are exempted from the calculation, but it would really be twisting the knife if they were!!

[Door Slider]

My first thought is that 05 and 15 both work on the principle that your pension is proportional to the average pensionable salary received across your career

AFPS15 is not a career average salary pension like 15. It’s more aligned with 75 and a final salary pension.

From the JSP: “Your benefits are based on your final pensionable earnings – that is the greatest
amount of pensionable earnings you received
for 365 consecutive days over the last three years of reckonable service.

[Easy Street]

AFPS05 is not a career average salary pension like 15. It’s more aligned with 75 and a final salary pension.

Thanks for the correction DS (and I have taken the liberty of correcting a typo in your quote!). Poor choice of words by me.

Having seen this (https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/820100/AFPS_Members_Guide_to_Taxation_of_Pension_Benefits.pdf) doc a couple of years ago at work I’ve just re-found it online... very useful for those new to this.

[Sandy Parts]

As I understand it (might be wrong - has happened :) ) the Budget increased the Annual Allowance? (https://www.gov.uk/government/publications/budget-2020-documents/budget-2020#budget-policy-decisions) - this section:
Tapered annual allowance for pensions – The pensions annual allowance is the maximum amount of tax-relieved pension savings that can be accrued in a year. For those on the highest incomes, the annual allowance tapers down from £40,000. HM Treasury has reviewed the tapered annual allowance and its impact on the NHS, as well as on public service delivery more widely.

To support the delivery of public services, particularly in the NHS, the two tapered annual allowance thresholds will each be raised by £90,000. This means that from 2020-21 the “threshold income” will be £200,000, so individuals with income below this level will not be affected by the tapered annual allowance, and the annual allowance will only begin to taper down for individuals who also have an “adjusted income” above £240,000. (7)

Am I reading it correctly that this will get rid of the Oct letters and retrospective tax charges for most military (up to those earning enough for 63% pension 'virtual annual contribution' to be more than £90k)?

Edit - NOTE - see my later post below as I think my assumption here is wrong - leaving post for thread clarity.

[Bob Viking]

I hope you’re right. If true, this is a significant good news story. Although, maybe a little late for some.

BV

[Sandy Parts]

I hope you’re right. If true, this is a significant good news story. Although, maybe a little late for some.

BV

Hmm - not sure I am. Reading into is a bit more and along with the current guidance on HMRC pages (https://www.gov.uk/tax-on-your-private-pension/annual-allowance), I think all he has done is increased the amount you can earn before the £40k limit gets reduced.
So previously, we all have £40K annual allowance BUT those then earning over £110K would have that £40K allowance reduced accordingly.
I think all he has done is raised that limit?
Therefore, we are all still limited to the £40K annual pension allowance but now only those earning over £200K will get the allowance reduced.
If so, we are still going to be hit with additional tax bill when NET earnings hit about £65K (using the 63% of earnings used for MOD pension 'contribution' figure).
Bummer.

[Easy Street]

SP,

1) The Budget announcement definitely doesn't help the majority of HM Forces personnel affected by the annual allowance. As your second post correctly identifies, the change is only to the thresholds which define the taper of annual allowance down from £40,000. Great news for 2*, 3* and 4* but no help for the rest of us. The reason why the Government has done it is to address the crisis among senior doctors, where salary top-ups resulting from overtime and private work triggered tapering, massive annual allowance breaches, and led some senior doctors to refuse all overtime and even retire early. A salutary tale of how taxing thin air had immediate and negative effects. The £40,000 still applies and reaches further down the rank scale (in the NHS, too).

2) The AFPS15 final pension accrues at 1/47 of annual pensionable salary. Multiply that fraction by 16 to find the notional uplift in your pension pot. So to achieve an annual input of £40k you'd need a pensionable salary of (40,000)*(47/16) = £117,500. [Health warning: it's a lot more complicated than that in reality. Promotions and time served will add AFPS75 benefits, increases in salary will add AFPS05 benefits, and your pre-existing AFPS15 pot grows in line with average earnings. All this eats into the £40k allowance before you start adding your AFPS15 input, although permitted CPI growth offsets some of it. Then you can carry forward unused allowance from the preceding 3 years...].

[Sandy Parts]

SP,

1) The Budget announcement definitely doesn't help the majority of HM Forces personnel affected by the annual allowance. As your second post correctly identifies, the change is only to the thresholds which define the taper of annual allowance down from £40,000. Great news for 2*, 3* and 4* but no help for the rest of us. The reason why the Government has done it is to address the crisis among senior doctors, where salary top-ups resulting from overtime and private work triggered tapering, massive annual allowance breaches, and led some senior doctors to refuse all overtime and even retire early. A salutary tale of how taxing thin air had immediate and negative effects. The £40,000 still applies and reaches further down the rank scale (in the NHS, too).

2) The AFPS15 final pension accrues at 1/47 of annual pensionable salary. Multiply that fraction by 16 to find the notional uplift in your pension pot. So to achieve an annual input of £40k you'd need a pensionable salary of (40,000)*(47/16) = £117,500. [Health warning: it's a lot more complicated than that in reality. Promotions and time served will add AFPS75 benefits, increases in salary will add AFPS05 benefits, and your pre-existing AFPS15 pot grows in line with average earnings. All this eats into the £40k allowance before you start adding your AFPS15 input, although permitted CPI growth offsets some of it. Then you can carry forward unused allowance from the preceding 3 years...].

Hi Easy - fully agree with your para 1.
Not sure about your para 2 - The guidance I've seen elsewhere gives the 63% figure (also earlier in this thread) based on a representative pension with equivalent benefits. I also think there was some guidance on the Forces Pension society pages so will try and link to that later. I certainly know guys on less than £117k who have received the letter from Veterans UK. For me, I've only got my AFPS15 'contributions' to calculate and I managed to obtain a figure for 2018/2019 by requesting one from them. I'll do the same for 2019/2020 and provide the figures once supplied.

[ForcesPensionSociety]

A link to our update on pensions implications of the Budget:

https://forcespensionsociety.org/2020/03/budget-11-march-2020-so-what-for-armed-forces-pensions/

[unclenelli]

I've spoken to HMRC and asked for my 1250L tax code to be assigned to my Pension.

As an Agency HGV Driver, my work is sporadic, haphazard and not guaranteed, so therefore my pension is my only guaranteed incone, falling just below the £12500 free-tax limit.
This means I pay 20% on everything I earn through Agency work, but I will get a rebate every April on taxed wages between pension & Tax code, throw that into Pension Pot #2 and I'm quids in!!!

26-yrs working to get my pension, then get taxed on it - Not for me - I've worked for my pension! I want it all!!! Max Commutation, then tax-free!
I'm beginning to consider myself "semi-retired" as I only do around 3 days a week of driving, yet still earn the same as I did when full-time RAF!

Go Figure!!!!!

[Countdown begins]

When I left earlier in the year I thought I was lucky not to get one of the ‘October special’ letter. I’ve been lucky to do quite well and have ramped up my private pension contributions.
Curiosity got the better of me and I asked for a Statement of what was going into my ‘pension pot’ from Veterans U.K., ready for a tax return.
I’m surprised what the PIA amount is, the Pension Input Amount that goes into your pot is very significant! I didn’t have a private pension last year and didn’t breach the £40k allowance, but I will do this year.
I can utilise last year’s allowance so there’s no drama, but I will now have to revisit last year’s return to use the allowance- but also add the PIA from last year. Does anyone know if I will get tax relief on a PIA?

[ForcesPensionSociety]

Sorry for the delay getting back to you on this. I had to ask the Team at HQ.All AFPS are unfunded and there is no ‘real ‘ pension pot that exists. For the purposes of Annual Allowance a method (devised by HMRC) is used to determine how much would have been contributed to achieve the increase in pension value over the year.There is no tax relief on the PIA (because it does not really exist). If you made any ‘real’ contributions such as ‘Added Pension’ where you purchased additional pension from your own income there will have been tax relief on those contributions.

[topgas]

The AFPRB take into account the fact that members of the Armed Forces do not contribute to their eventual pension. They are meant to find a civilian comparator job to set the salary. They then abate that by a percentage (used to be 7%, IIRC) from the "equivalent" civilian job salary. So, it is "non contributory", but allowed for in the pay scales.