|Calculating The Value Of Your Pension|
Lieutenant Commander David Marsh, the Pensions Secretary of the Forces Pension Society introduces a tool which allows individuals to make pension forecasts, not only for their current pension scheme but also for potential awards under the new AFPS15 pension scheme too
Did you know that the Ministry of Defence provides a calculator on the internet to help you work out the value of your pension? It can be found at www.mod-pc.co.uk
If you are not familiar with it, I strongly advise you to take a look and find out what your pension is worth. If you have seen it before, you may be interested to know that on 3rd June 2013 the Ministry of Defence updated it with a new calculator. This tool allows individuals to make pension forecasts, not only for their current pension scheme (AFPS75 and AFPS05) but also for potential awards under the new AFPS15 pension scheme too.
After watching the videos available on the home page that introduce the new calculator, and ticking the box to accept the terms and conditions of use, the opening few pages are of a similar presentation to the old calculator. One thing of significance that might be noticed on the opening page is the removal of a number of caveats and explanations (which hardly anybody took the trouble to read, unless the end forecast was nothing like that which was expected).
On the second page, where you tell the calculator which scheme you are a member of, the machine will, based on the data you input into the first page, only offer you the chance of selecting the scheme(s) that is (or are) applicable to you. That is to say, if you were aged 45 or over on 1st April 2012, you will not move onto the new AFPS15 scheme that comes into force on 1st April 2015, but will remain on AFPS75 or AFPS05 as appropriate; in such a case the calculator will offer you a choice of either AFPS75 or AFPS05.
Those individuals in this position will not see any difference in the layout or appearance of the calculator from this point in proceedings. However, if you were under age 45 on 1st April 2012, and have an exit date after 31st March 2015, you will move onto the new AFPS15 scheme on 1st April 2015, and under these circumstance the calculator offers you a choice of AFPS75/AFPS15 or AFPS05/AFPS15, and from this point things get a little more interesting.
Having told the calculator whether or not you have split service (joined up and re-entered after a break); are in receipt of a salary from a specialist pay scale or are commissioned from the ranks; you come to the second most interesting page of this new tool in which you determine your career aspirations between now and your expected exit date. For example, if you are currently a Corporal and anticipate leaving the Army in 12 years’ time, but expect to exit as a Staff Sergeant, the calculator allows you to enter the dates you anticipate being promoted, first to Sergeant, then to Staff Sergeant. This allows the machine to calculate your expected salary receipts in those ranks, for the number of years the different ranks are held.
Remember, under the AFPS15 scheme, your pension is calculated on a yearly basis using the salary you have received for each year of service between April 2015 and your exit date…and the salary of a Sergeant on promotion is less than that of a Staff Sergeant with three years’ seniority in that rank. Be realistic with what you enter on this page because the final readout will calculate your expected pensionable benefits from the data you supply; N.B. not everyone can leave as Chief of the Defence Staff!
The final page offers individuals, who will leave with AFPS15 entitlements, a much more complex readout than was the case with previous editions of the calculator. To begin with, they have the choice of how they would like their forecast to reflect potential growth of their AFPS15 fund on an average annual basis between April 2015 and their exit date. This means that the AFPS15 pension 'pot' that they have earned will, just before each new year’s earned pension is added, be increased by the Average Earnings Index (AEI) to ensure that past earned pension keeps pace with national earnings levels.
Now, individuals can decide to add a little bit of realism here by clicking one of the optional average AEI increase rates they anticipate occurring between April 2015 and their exit date, other than the default level of ‘zero’. Of course, by selecting one of the other choices, your AFPS15 pension entitlement will indeed appear to be a greater and more realistic figure payable on your date of exit, but what is not taken into account is potential inflation rates over the same period, which are likely to reduce the buying power of the award to something just above, or close to, the default figure of ‘zero’ anyway, so selecting the higher options could be a little optimistic if you want to measure your entitlements against today’s living standards.
A little further down the page we see what we are hoping for – our forecast in pounds and pence. There are all sorts of final outcome permutations that are too numerous to go into detail in this article, but I want to concentrate of the AFPS15 output (since AFPS75 and AFPS05 are quite self explanatory and familiar to many individuals anyway). In the majority of cases there will be, providing you have completed at least 20 years’ continuous service prior to your exit date, an AFPS15 Early Departure Payment (EDP) award payable immediately on exit.
This EDP award comes in two elements; first, there is a tax free lump sum which is equal to 2¼ times the annual pension you have earned from your AFPS15 service. Second, there is an EDP annual income stream payable from an individual’s date of exit to the date they reach their State Pension Age.
Individuals are allowed to surrender the EDP lump sum to enhance their EDP income stream, if they would like to do this, and the forecast readout shows how much the EDP income stream will be increased if this option is exercised. There is no option to surrender the EDP income stream for a larger EDP lump sum. The forecast also details the annual pension earned from your AFPS15 service.
There is no automatic lump sum with AFPS15, as there is with AFPS75 and AFPS05, but there is an opportunity to surrender 25% of the value of the fund to buy a lump sum when the pension comes into payment (not available before that as many are assuming). In the Commutation Box of the read out, figures can be found detailing the maximum amount of lump sum that can be bought and the pension remaining after opting for that choice.
I mark this new calculator 7½ out of 10. The timeframe given to have this gadget up and running for all to use was tight, given the complexity of permutations that have to be catered for; indeed there is to be an updated version in place (hopefully) by the end of the year that will allow Reservists, MPGS, NRPS, et al to use it who, are not catered for on the current version.
There are a couple of niggles that continue to exist as a ‘carry forward’ from the old calculator that could probably have been easily ironed out. For example, why does it ask for a date of qualification from an individual serving on the AFPS75 scheme in receipt of Professional Aviator’s Salary (PAS) when, despite the fact that they have to serve 5 years on that salary spine, it will credit their pension forecast with PAS supplement anyway, even though there is no entitlement?
Also, it cannot yet cope with those on AFPS75 who have completed at least 12 months’ service in the higher rank, but not the two years to qualify for a full pension in the higher rank? However, I understand that will be in place when the next version appears at the end of the year. Furthermore, I was a little puzzled to understand that if it was possible to install a mechanism that allowed AFPS15 pension values to be increased annually on a compound basis, why is it that the AFPS05 members could not have their salaries dynamised for inflation too, as there are only two rates of inflation that can be used at any one time? Perhaps that will also come along in a later version.
Finally, I am intrigued that the calculator, when determining the amount of lump sum that can be obtained through commuting 25% of the value of the AFPS15 pension (at the given rate of £12 lump sum to every £1 of pension surrendered), has used an extremely complex actuarial formula that takes away any correlation between the pension awarded figure on the forecast; the maximum lump sum that can be raised and the pension remaining in payment! On this occasion the 'KISS' approach 'Keep It Simple Stupid' might have been better deployed. I would prefer a simple entitlement based on the pension award on exit to be displayed as the forecast shows, not as a projection into the future. The reason is that to the majority of users the unauditable figures currently being offered might just as well be pie in the sky.
If you would like to find out more about your armed forces pension and you are a member of the Forces Pension Society, you can do so by looking at the Society’s web site or by calling the dedicated help line on 020 7735 0110. If you are not a member, the cost is modest and benefits (in addition to advice from an expert) include numerous discounts on a range of useful products and services and the assurance that a dedicated organisation, independent of the Government, is championing the pension interests of the Forces and their families.
For more information about joining the Society please go to www.ForcesPensionSociety.org
|Last Updated ( Monday, 29 July 2013 )|
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