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How Good is Your Pension?

We are often asked by military audiences how the Armed Forces pension compares with those of others in the public sector. So we thought we would write about it, comparing the provisions of the various new schemes introduced in 2015

It is certainly true that AFPS 15 is not as generous as AFPS 75 or AFPS 05; that is one of the reasons it was introduced. But rather than look back, this article looks at what others are getting across the public sector and reveals that, in the round, the Armed Forces pension is better than others. That is not something to crow about; the pension reflects the unique nature of military service and the toll it takes, so it is right and proper that it is unique in construct; but it is worth noting that this rationale is understood and properly addressed.

The best way to illustrate the differences between the various public sector schemes is to display the information in tabular form to make the comparisons bold and clear.

In each case the source of the information in the table is the booklet for the scheme in question or the scheme website, and we have limited the comparisons to the main provisions only (what does it cost? what do I get if I live? and what does my partner get if I die?).

All schemes give the deferred pension age as the State Pension Age (SPA) of the member; all schemes allow the deferred pension to be drawn as early as age 55 with actuarial reductions (to take account of the fact that they have come into payment before SPA) and all allow a maximum lump sum of 25% of the value of the pension pot – but there the similarity ends.

Looking first at the accrual rate (the rate at which the pension builds up). The only scheme with a better accrual rate than AFPS 15 is the Civil Service scheme (1/47 vs 1/43.1) but members of the Civil Service scheme have a contribution level of between 4.6% and 8.05% to get that. We know that legally all the Armed Forces Pension Schemes are, and always have been, non-contributory (although the Armed Forces Pay Review Body take account of the non-contributory pension when they are arriving at their pay recommendations). But, AFPS members need to remember that the contribution rates for other public sector schemes range from 4%-14.5%!

Members of most public sector schemes have to work until their SPA in order to leave with their pension in payment, but the uniformed services are treated differently in regard to their normal retirement age. If members of the Armed Forces, the Police Force or the Fire Service serve until age 60, their pensions are payable immediately – and, remember, for the Armed Forces, Part Time Volunteer Reserve (PTVR) service is now pensionable under 15 rules as is Full Time Reserve Service (FTRS), so serving to age 60 is not as unlikely as it at first sounds

Many regular service personnel also remain unaware that Early Departure Payments (EDP) linked to AFPS 15 are unique; other professions simply do not receive these. A lump sum and an annual income to those who serve until at least age 40 and have at least 20 years Regular paid service (AFPS 05 was the first to feature an EDP scheme, devised to take account of the fact that the 2004 Finance Act outlawed the payment of pensions before the age of 55, save in the event of medical discharge, so for many, EDP took the place of the immediate pension available under AFPS 75). The AFPS 15 EDP features a tax free lump sum worth 2.25 times the deferred pension and an annual EDP income of at least 34% of the deferred pension. EDP income continues until SPA, (even if the individual draws his or her deferred pension early, otherwise this kicks in at SPA),

Whilst the majority of Regular Servicemen and women do not serve long enough to qualify for EDP payments, many do serve until their 12 year point – and this qualifies them for a tax free Resettlement Grant (RG), which, for AFPS 15, is just over £11K (and of course all with more than two years’ service will be eligible for a deferred pension at SPA). Again, no other public sector group receives anything like a RG.

Note that we are careful to specify ‘Regular’ personnel as being entitled to EDP and RG: service with the PTVR and FTRS does not qualify toward EDP or RG entitlement.

The table below illustrates that, in the event of death, AFPS 15 benefits are more generous than others. Admittedly, some of the other schemes pay various levels of short term family pension, but the AFPS15 death in service lump sum of 4 times pensionable pay and the spouse/partner pension of 62.5% more than makes up for this.

So, in summary, the changes resulting from Lord Hutton’s recommendations on the future of public sector pensions resulted in all public sector workers’ pensions being less generous. The Armed Forces came out with the best scheme achievable at a time of financial crisis, and a period of austerity that we have not yet seen the back of. AFPS 15 offers an excellent accrual rate, early departure benefits (EDP and RG) which are unavailable to other public sector workers and also provides higher spouse/partner benefits than the other schemes. So, even if you are not jumping for joy, let’s hope you are at least reassured!

Note: This article is written against the back drop of the successful Court of Appeal challenge by the Fire Fighters and Judges against the transitional arrangements for their transfer to new 2015 pension arrangements.  As a result, all public sector pension schemes will be required to rectify the results of the discrimination that occurred. How this will happen is as yet unclear.  However, this article deals with the current position, not what might happen in the longer term.  But, it does make the assumption that whatever solutions are adopted to resolve the discrimination, the new public sector pension schemes introduced in 2015 are not going to go away.

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