State pensions are very much in the news at the moment, given the changes to the ‘triple lock’ and the fact that for some 30% of the population the state pension remains their only pension.
It is therefore worth understanding the relationship between your occupational pension and the state pension. In this article, we explain the often complex relationship between the two.
Armed Forces pensions are occupational pensions earned by virtue of reckonable service (RS) in the Armed Forces.
The state pension is a non-means-tested benefit based on the number of National Insurance Contributions (NICs) you have paid. So far so good – two separate pension arrangements earned in different ways.
National Insurance Pension Scheme
However, for those with RS between 1 July 1949 and 5 April 1997, there is a crossover due to the introduction of the National Insurance Pension Scheme and subsequent ‘contracting out’ legislation between those dates.
For those whose RS started on or after 6 April 1997, there is no crossover, so they will be spared the necessity of understanding most of the following byzantine provisions.
The National Insurance Pension Scheme was introduced fully in 1948 and employees and employers were obliged to contribute, irrespective of whether the employer concerned already had an occupational pension scheme in place.
To avoid employers with their own schemes paying twice for the same pension in respect of the same period of service, provision was made that the occupational pension scheme should be reduced.
For AFPS, the reduction – called the National Insurance Adjustment (NIA) – for each year of RS between 1 July 1949 and 31 March 1980 (inclusive) is 87p, and that sum has not risen over the years. The NIA is applied to the AFPS pension at the member’s state pension age, even if they defer claiming the state pension.
If your state pension age falls on or after 6 April 2016, this is the only adjustment that you will see – so, this would apply to people with RS before 31 March 1980 who were born before 6 April 1951 for males or 6 April 1953 for females.
On 6 April 1978, when the government introduced an additional state pension – or State Earnings Related Pension Scheme (SERPS) – it also introduced a two-tier NICs system – a higher contribution rate for those ‘contracted in’ to SERPS and a lower contribution rate for those ‘contracted out’.
The SERPS deal
Employers could contract their pension scheme out of SERPS in exchange for a promise that the employer’s pension scheme would pay a pension of at least the value of the SERPS additional state pension that the employee could have earned had the employer’s scheme been contracted in to SERPS.
It is the value that would have been earned in SERPS which is called the Guaranteed Minimum Pension (GMP). The GMP is the minimum that the MOD must pay to the individual in order to meet their promise under the ‘contracting out’ rules – defined benefit schemes like yours easily achieve this.
The GMP element of your pension appears on your state pension award letter and is referred to as “contracted out deductions” (COD). It is neither an addition to nor a reduction of the Armed Forces pension. It is the amount of your Armed Forces pension which, once you start to draw your state pension, will not necessarily increase in line with the inflation measure (currently Consumer Price Index or CPI) every April. Instead, it will be paid in whole by the Department for Work and Pensions (DWP) or by a combination of AFPS and the DWP, depending on the date the pension was earned.
This is a complicated subject, so tomorrow we will clarify some of the questions that come to us on this topic.
