|Your State Pension Entitlement - Explained|
There is a misconception among many Service personnel that because they have earned an Armed Forces Pension from the Government during their military service, that they do not have an entitlement to a State Pension later in life. Lieutenant Commander David Marsh from the Forces Pension Society dispels that myth and discusses the significance of this valuable asset and the reverence with which it should be treated
The State Pension system currently comes in two parts: Basic State Pension and Additional State Pension. I will discuss the Additional State Pension part first. An Additional State Pension can be made up of a combination of Graduated Pension Scheme, SERPS or State Second Pension. Members of the Armed Forces have, throughout their Service career, been paying Class One National Insurance Contribution (NIC) at a level that entitles them to a Basic State Pension only.
There are two rates of Class One NIC: ‘contracted in’ and ‘contracted out’. Those who pay the lower ‘contracted out’ rate will earn credits towards a Basic State Pension only; those who pay the higher ‘contracted in’ rate earn credits not only towards a Basic State Pension, but also towards an Additional State Pension, currently known as the State Second Pension. Whether an individual pays the ‘contracted in’ or ‘contracted out’ rate of NIC depends much on whether they belong to a company pension scheme that is contracted out, or, whether they are contributing to a private pension scheme, having elected to contract in or out.
The Armed Forces Pension Schemes are all contracted out of the State Second Pension scheme. By definition, therefore, members of such a scheme have no choice but to be contracted out too. This means that Servicemen and Service women pay the contracted out rate, so only have credits towards a Basic State Pension, and nothing in the way of State Second Pension entitlement for their time spent in the Armed Forces. Initially that might seem a little harsh, but on the plus side the amount of NICs paid throughout a military career have been 1.6% less than would otherwise have been the case.
The benefit to the ‘Scheme’, for opting to ‘contract out’, is the receipt of a rebate from the Government paid into its ‘Fund’ in recognition that the Government will not have to bear the cost that an Additional State Pension would otherwise incur on the Treasury. Now we all know that the Armed Forces Pension Schemes do not have ‘funds’ per se, but the rebate is notionally credited towards the cost of the Schemes, helping to maintain the strong benefits that are payable to those members qualified to receive them.
A scheme, for the privilege of being able to ‘contract out’ and receive the Government’s rebate, must be capable of, and make a promise to the Government that it will pay pensions to its members that are equal to, or greater than, the ‘Guaranteed Minimum Pension’ rates (which the AFPS schemes more than do).
So, having established what State Pension entitlement Service personnel have been contributing towards and why, how much is the award likely to be, and how long must one continue to pay NICs in order to receive the maximum pay out? To receive a full Basic State Pension, you need to have earned 30 years’ worth of NIC State Pension credits.
These credits are usually gained through the NICs made on salaries paid. Most individuals will achieve this target at an age somewhere between 46 and 50. I should stress that once you have reached the 30 years point please do not think (as many would like to believe) that you stop paying NICs on your salary; that privilege only occurs at the time you reach your State Pension Age!
What is the value of a full Basic State Pension? Currently it is £107.45 per week. That might not sound like very much, but if you multiply that by the number of weeks in a year (52) it amounts to £5,587.40 – more than half a Sergeant’s pension after 22 years’ service on AFPS75. It is, therefore, quite a valuable asset, and should not be ‘pooh-poohed’.
Once Armed Forces personnel leave the Services, the gap between the value of their Armed Forces pension and the value of their Basic State Pension will contract. The reason for this is that Armed Forces Pensions increase only by the Consumer Prices Index (CPI) rate of inflation, whereas the Basic State Pension is looked after by a mechanism known as the ‘triple lock’; that is to say its value will increase by the CPI, the Average Earnings Index (AEI) or 2.5% whichever is the greater.
At the moment the CPI is highest of the three; so the value of both schemes is increasing at the same rate, but it will not be long before the CPI is lower than either the AEI or 2.5% (or both), and when that happens the Basic State Pension will increase at a greater rate than Armed Forces pensions.
There are a couple of key points in one’s life that members of the Armed Forces should begin to take a deep interest in exactly where they stand in terms of Basic State Pension entitlement. The first is several months before their exit date, and the other is on making a decision to emigrate to another country. The reasons are: first, it is useful to know where you stand and second, if you are about to go abroad you won’t be earning a salary in the UK and hence won’t be paying NIC.
Therefore, if you have not yet paid for 30 years, you might want to consider topping up your contributions. This can be done by paying what is known as Class Three NIC, which amounts to £13.25/ week. There is a document called CA38 on the Inland Revenue website that tells you how you can go about doing this.
Obtaining a State Pension forecast is quite straightforward; it can easily be obtained by logging on to the DWP website at www.direct.gov.uk and clicking on the link to forecasts where the instructions are very clear and easy to understand.
Should you become unemployed after leaving the Forces, you won’t be earning a salary and paying NIC. Therefore you might think that you can’t keep building towards your Basic State Pension but, fortunately, this is not so. Applicants for Job Seekers Allowance will be credited as if they were still in employment so, from a pension entitlement point of view, it is very advisable to ‘sign on’ in such circumstances.
If after leaving the services you secure a new job and are given the choice of contracting in or contracting out; what should you do? I will answer that in next month’s article. However, if you need to know urgently and if you are a member of the Forces Pension Society, you can call the Society on 020 7820 9988 and we will gladly explain.
For more information on the Forces Pension Society, please go to www.ForcesPensionSociety.org
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