Home Resettlement Personal Finance Is AFPS 15 Advantageous To Anyone?
|Is AFPS 15 Advantageous To Anyone?|
Well, yes, actually – the Forces Pension Society encourage you to read on!
It is certainly true that Service personnel who serve a full career in the Regular Armed Forces as AFPS 15 members will be worse off in terms of their pension income than those on previous schemes.
This is because instead of having their whole period of service counted in their rank for pension on exit (for AFPS 75 members) and their Final Pensionable Pay (FPP) (for AFPS 05 members), their pension will build up year-on-year based on 1/47 of their pensionable pay, with the pension earned in earlier years being increased by an earnings index. It is a career average rather than a Final Salary/Final Salary related scheme. However, there are two groups for whom AFPS 15 holds clear advantages and these advantages need to be applauded. The two groups are:
Members of the PTVR who, before 1 April 2015, were only pensionable if they undertook an operational tour, moved on that date from having no pension provision for non-operation duties and Man Training Days to eligibility for membership of AFPS 15. This is an obvious improvement, but what does that mean in terms of facts and figures?
Before 1 April 2015, those who undertook operational tours were entitled to be members of RFPS and qualified for preserved pensions with no minimum period of service. However, because RFPS has a two year qualifying period for ill-health and family benefits, and an operational tour lasts for an average of 8-9 months (including pre-deployment training and leave), this meant that, even though they put themselves in harm’s way they would not normally qualify for these benefits should they be injured, or worse case scenario – die – unless in the line of duty.
AFPS15 also has a two calendar year qualifying period before entitlement to ill health and family benefits can be paid; however, PTVR service given before 1st April 2015 will count towards this qualifying criteria, providing the individual qualified for the award of the Bounty. Those who were former Regulars with more than two years service, who join the PTVR within five years of leaving Regular service, will also qualify automatically for all benefits from the first day they start their PTVR time as their service is, under AFPS 15, considered as continuous, whether it be Regular or Reserve.
Given the readership of Pathfinder, the example I am going use is that of somebody who has retired from active regular service and elected to join the PTVR almost immediately on exit. Our individual happens to be a 40 year old Staff Sergeant (SSgt) who retired from the regular Army on 1 April 2015 after 22 years’ service. He has been awarded an AFPS 75 pension of £12,388 and his Terminal Grant (TG) of £37,164. He then joins the PTVR.
Even though PTVR service is now pensionable, and there has been a break of less than 31 days, the TG does not have to be repaid – this is a big worry for some who remember the old requirement for a formal break in service which, if not observed, would put the TG at risk of repayment. ‘What about abatement of my pension?’ I hear you ask. Well, the pension at the Immediate Pension Point is roughly 30% of pay and that means that PTVR income would have to reach about 70% of this individual’s rate of pay as at 1 April 2015. That is most unlikely unless he undertakes an operational tour BUT the abatement rules exclude income for periods of operational duty – so again, there is no disadvantage.
Some readers might be leaving with AFPS 05 Early Departure Payment (EDP) Scheme benefits – that is a tax free lump sum on exit and an EDP income stream payable until age 65. I am sure you all know that if an individual who leaves with an EDP takes up an FTRS or ADC post, they must pay back the ‘unused’ element of the lump sum and the EDP income stream ceases immediately. However, if you take on a PTVR service role it does not affect any of the EDP awards given in any way – you keep the lot.
Given that this SSgt has joined the PTVR within 5 years of leaving the Regulars, he will automatically qualify for all AFPS 15 pension benefits (deferred pension, ill health benefits, Death in Service and family benefits) from the first day of his PTRV service.
Let’s assume our SSgt serves 10 years with the PTVR, during which time he undertakes two operational tours. On the basis that his salary will rise by an average of 1.5% per year and that the Earnings Index is 2.8% (modest assumptions but arrived at in the light of recent experience), the resulting AFPS 15 pension would be £2.310. Since he is leaving before age 60, this pension is classified as a Deferred Pension. Deferred pensions increase in line with the Consumer Prices Index (CPI) and are normally paid at the individual’s State Pension Age. However, the member could ask for it to be paid as early as age 55 (with actuarial reductions).
There is no automatic lump sum but 25% of the value of the pension could be surrendered to generate one. As an illustration (but acknowledging that the example does not take into account CPI between April 2025 and 2040!), 25% of the value of the SSgt’s pension is calculated to be £825.25 (this is arrived at by taking a factor of 20/56ths of the pension earned – not 25% of the pension earned) of his pension to generate an tax free lump sum of £9,903.04 (the “deal” is to give £12 tax free in the form of a lump sum, for every £1 of pension surrendered). The pension remaining would therefore be £1,485.46.
Let us turn now to those who take up FTRS/ADC posts after 1 April 2015. I have already explained that there is a two year “vesting period” for those joining AFPS15 before qualifying for any of its benefits. However, although this could be seen as a disadvantage, since RFPS didn’t require the same qualifying period for preserved pension rights, for the first time, periods of service can be added together to result in one pension. RFPS treated each period of service as separate in respect of the actual pension paid – the time served is added together to meet the qualifying requirement but a pension will be awarded for each separate period of service.
This means that an individual who has completed 3 separate commitments would have 3 separate pensions which will be worked out separately and, when they become payable, would be added together to give a single figure. Even if the RFPS member retired at age 60, he would have to wait until age 65 for the preserved pension for any earlier periods of service, only the most recent entitlement coming into payment immediately. The increase applied to these small pensions is the CPI for each year since the commitment ended.
As AFPS 15 treats breaks of less than 5 years as continuous service, previous pension savings within the scheme are increased in line with Average Earning – which is normally a higher percentage than CPI. This particular aspect of AFPS 15 is a distinct advantage for FTRS and ADC personnel with multiple periods of service with less than a 5 year break between each – add to that the fact that, if they retire at age 60, all benefits will be paid at once rather than waiting for benefits in respect of earlier periods as would be the case for RFPS members.
Some will cite the disappearance of FPP in the formula for calculating pension benefits as a disadvantage but, as FTRS/ADC commitments are normally at a specified rank, this has a lesser affect on this group than on regulars who go through a number of ranks during their Service career. We have worked out that, for 3 year period of service under AFPS 15, assuming pay for the three years as £42K, £43K then £44K, CPI of 1.2% and the Earnings’ Index as 2.6%, a pension of £2,815.53 would be earned with the option to give up £1,005.55 to generate a lump sum of £12,066.55 (pension remaining is £1,809.98). The equivalent under RFPS rules would be a pension of £1,885.71 with a lump sum of £5657.13.
This demonstrates that way that AFPS 15 pensions are calculated, when compared to the same earning and length of service under RFPS, does not disadvantage the member and, indeed, gives him or her the flexibility to choose the size of his lump sum and have a much bigger lump sum should he so choose.
AFPS 15 introduces an extra Tier for ill-health benefits for Reserves. Further, the way it calculates new Tiers 2 and 3 benefits is potentially far more generous than the formula used for RFPS Tiers 1 and 2. This is because RFPS enhancements are limited to a proportion of the remaining engagement period whereas AFPS 15 uses a proportion of prospective service to age 60. In this article I will limit my example to the introduction of the new Tier (new Tier 1) but Forces Pension Society members can learn more about Tiers 2 and 3 from the leaflets in the Members’ area of our website.
Ill-health benefits were never paid to RFPS members who were unfit for military service due to conditions which would not significantly impair their potential for civilian employment – AFPS 15’s Tier 1 changes this. The new AFPS 15 Tier 1 entitles members to a tax free lump sum and a deferred pension. The tax free lump sum based on 1/8 of FPP multiplied by length of service, with a minimum pay out of 6 months pay and a maximum of 2 years pay. So, if the individual had completed 5 years’ of a six year commitment and a FPP of £44K, his lump sum would be (£44K x 5/8) £27,500. This improvement is very obvious (£27,500 under AFPS 15 rules vs nothing under RFPS rules!).
So, in summary, the introduction of AFPS 15 may have had members of the Regular Armed Forces wringing their hands at the loss of benefits (although they are still in a better place than most people on other pension schemes - be they public sector or private) but Reserve personnel come out of the change very well indeed!
If you have questions about it or any of the Armed Forces Pension Schemes, and you are a member of the Forces Pension Society, you can call the Society’s dedicated help line on 020 7735 0110 or find answers on its web site. If you are not yet a member, the cost is modest and benefits (in addition to the best available expert advice) include discounts on a range of useful products and services and the assurance that a dedicated organisation, independent of the Government, is there to help you and your partner get the most from the scheme.
For more information, go to www.ForcesPensionSociety.org
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