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Flexible Service – How does it affect your Armed Forces Pension?

Flexible Service (FS) became law on 1 April 2019 allowing serving personnel to ask to work part time and/or to restrict their separation from their home base. This article seeks to highlight the main impact of FS on Armed Forces Pension Schemes (AFPS) – but comes with the caveat that as yet we have no practical experience of the new rules in action - so we are very keen to hear from anyone about their experiences and particularly if they have received conflicting advice from any sources, so that we can establish ground truth. The new FS regulations do allow personnel to work for reduced hours – and so will result in a proportionate reduction in pay and benefits (including pensions). They will not however impact on previously accrued entitlements. This “proportionality” is intended to ensure that serving personnel that apply for the new FS options are neither advantaged nor disadvantaged against their peers that do not. What will be the impact on my pay? The reduction in working hours (can be either 20% or 40%) results in a corresponding reduction in pay. The adoption of restricted separation will see the X factor element of pay fall from 14.5% to 11.5%. (These are the rates for regular personnel up to and including the rank of OF4 – Higher ranks who have a tapered X factor will see a corresponding reduction in the X factor element of their pay for restricted separation). Personnel can combine part time working and restricted separation and their pay will reflect both reductions. So someone with a full time salary of £50,000 who opts for a 20% reduction in hours and to have restricted separation would see their pay fall to £38,951.97. (£50,000 x 0.80 x 111.5/114.5 = £38,951.97). Which AFPS Benefits are not affected? Although FS results in a reduction in pay some Armed Forces Pension Scheme (AFPS) entitlements remain unaffected. As a general rule those benefits that are triggered by time served will still be available even if the SP switches to FS for part of his/her service :-
  • AFPS 75 immediate pension (IP) qualification date. This requires eligible personnel to serve for 22 years from date of entering into service or age 18 (if later). For Officers the IP point is after 16 years qualifying service (from age 21). These qualification dates are not affected by FS although the value of IP itself will be reduced to reflect the period of FS as explained below.
  •  AFPS 05 Early Departure Payment (EDP) qualification date. To qualify forAFPS 05 EDP eligible personnel must serve for 18 reckonable years and be aged 40 or more. The date on which both these criteria are met is known as the 18/40 point. This is a fixed date in time and qualification is not affected by FS. As with AFPS 75 IP qualification, the level of benefits earned will be reduced to reflect periods of FS.
  • AFPS15 EDP qualification date. Personnel must serve for 20 qualifying years and be aged 40, as with AFPS 05. Again the timing of the 20/40 point is not affected by FS but the resulting EDP and pension benefits will be reduced to reflect FS.
  • Resettlement Grant (RG) qualification dates.AFPS 05 and, AFPS 15 require 12 years of service to earn an RG entitlement. In AFPS 75 the requirement is 9 years (Officers) and 12 years (ORs). FS does not affect either the timing of the qualification or the amount payable.
  • AFPS75 time in rank requirements. To have your AFPS 75 benefits calculated based upon your higher rank you need to have served at the higher rank for at least 2 years (up to and including OF6) or 1 year (OF7 and above). These qualification periods are unaffected by time in FS.
  • If benefits are calculated by reference to Final Pensionable Salary, (for example AFPS 05 pension benefits), then these will be calculated on “Full time Equivalent Earnings” rather than the FS earnings actually paid. This ensures that benefits are not unfairly reduced by a decision to adopt FS at the end of the SP’s military career.
Which AFPS Benefits are affected by FS? The extent to which someone’s AFPS benefits are affected by FS will depend upon the mix of schemes that provides their benefits.
  • AFPS15 benefits only. AFPS 15 pension benefits are directly linked to the pensionable earnings in a scheme year, providing a pension of 1/47th of the monies earned between 1st April and 31st March the following year. So SP earning £47,000 pa will earn a pension of £1,000 pa for that year. If he decides to reduce his hours by 20% this will reduce his pay and pension accordingly (£37,600 pay and £800 pension). As EDP is calculated as a percentage of the deferred pension FS automatically reduces EDP entitlement proportionately as well.
  •  SP with AFPS 05 benefits only. This is the complicated one. AFPS 05pensions are calculated as years of reckonable service x final pensionable salary/70. As explained above, Final Pensionable Salary will be calculated on Full Time Equivalent Earnings rather than the actual FS pay, so in order to maintain proportionality reckonable service has to be reduced to reflect periods of FS. This reduces the service entitlement whilst on FS by the same proportion that FS pay is reduced by comparison to Full time Equivalent Earnings. The “service reduction” formula that captures this is:-
(A-B)/A Where A is the basic pay that would have been received if not serving under FS and B is the actual pay received for the period of FS. Thus: somebody serving for 1 year with 20% less hours (but no restricted separation) would earn 20% less than their full time counterpart. If they served for 23 years including this one year on FS then the AFPS05 pension would be calculated as follows:- Reckonable service x Final Pensionable Salary/70 where: Reckonable service = 22 + (1-0.20 = 0.8) years = 22.8 years. Final Pensionable Salary = Full time Equivalent salary
  • Calculation of EDP 05. As mentioned before, the 18/40 point is not affected by FS. Neither is the figure used for Final Pensionable Salary. However as the EDP award is a percentage of the deferred pension the “service reduction formula ” used to determine the AFPS 05 pension will also feed through to an automatic and proportionate reduction in EDP 05.
  •  Those with AFPS 75 benefits only. Those ofOF 7 and above will have their AFPS 75 pension based upon the Final Pensionable Earnings (Full time Equivalent Earnings). Those below the rank of OF 7 will have their pensions based upon the representative rate of pay for their rank. There is no distinction for those serving on FS. As such, in order to maintain proportionality, the same “service reduction” formula is used to determine reckonable service for the purpose of calculating benefits. Importantly, the service reduction formula will also apply when determining the addition of professional supplements for specialists such as Medical/Dental Officers, Professional Aviators, Nurses, and Clearance Divers. Note that the service reduction formula which reduces reckonable service credit does mean that those on FS can still build up an entitlement, albeit at a slower rate, towards the maximum reckonable service entitlement (34 or 37 years).
  •  Those with AFPS05/15 benefits. In order not to compromise the rule that previous accrual will not be impacted by the new FS options, the “service reduction” formula will not be applied to existing AFPS 05 benefits, so AFPS05 and EDP 05 benefits will not be impacted by FS. However, AFPS 15 benefits (both pension and EDP) are automatically reduced to reflect periods of FS so no further adjustment is required.
  •  Those with AFPS75/15 benefits. As with the 05/15 members, this cohort will have locked in their AFPS 75 service prior to the introduction of FS. As such the service reduction formula does not apply. Instead, AFPS15 benefits will be automatically reduced to reflect any periods of FS.
The situations described above refer to “straightforward” circumstances. But for those on FS who are likely to be medically discharged or facing annual allowance or possible pension abatement issues because of FTRS are encouraged to contact the Society so that their own individual circumstances can be explored. FS is an attempt to move with the times and adjust working practices that are in step with current lifestyles and aspirations. As such it is to be welcomed  - but that doesn’t make it simple. If in doubt, ask.   Regular personnel can find out how flexible service will impact their pay and benefits at Discover My Benefits.

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