Home Resettlement Personal Finance What’s The Relationship Between Your Armed Forces Pension And Your State Pension?
|What’s The Relationship Between Your Armed Forces Pension And Your State Pension?|
David Marsh, Pensions Secretary of the Forces Pension Society (FPS) explains…
There is a link between the amount of pension you are paid from your Armed Forces occupational pension and the award of your State Retirement pension which nobody seems to know anything about - that is, until their State Retirement pension comes into payment, and then it comes as a shock.
It is usually at this point that the individual begins to notice that their Armed Forces pension does not increase by quite the full amount that the CPI inflation rate says it should, and the Forces Pension Society help desk will field at least 50 enquiries each year from disgruntled members who feel that they have been short-changed. The whole mechanics surrounding this issue are not the easiest to understand, but knowing about it now will make it easier to understand and digest when it happens.
The link between occupational pensions and old age pensions stems back as far as 1947. In that year, the 1947 Social Security Act deemed that all members of a public sector pension scheme were to have their government occupational pension abated by (what is now) 88p for each year of reckonable service given in the scheme, from the moment they reached their state pension age. This abatement is known as a “National Insurance Adjustment” and is applied to your Armed Forces pension from the point you reach your state pension age; it does not matter whether you elect to take your State Retirement pension at the earliest opportunity or defer it to a later date, this National Insurance Adjustment is applied at your state pension age regardless.
However, it is possible that your pension will not be affected by the National Insurance Adjustment because it ceased on 6th April 1980. This means that only reckonable service up to 5th April 1980 can be counted when the calculation of National Insurance Adjustment is made. Therefore, this aspect of the relationship between Armed Forces and State Retirement pensions will affect only those who have more than 35 years’ reckonable service today, and it will only be the additional portion of reckonable service over 35 years that will attract any adjustment when you reach your state retirement age.
Nevertheless, there is a second form of adjustment made to your Armed Forces pension that could occur when your State Retirement pension kicks in; this is known as the Guaranteed Minimum Pension (GMP) adjustment, and this will affect anybody with an Armed Forces pension from service given prior to 6th April 1997. However, unlike the National Insurance Adjustment, the GMP adjustment only occurs when your State Retirement pension comes into payment; if that happens to be your state pension age then it will be effective from that point, but if you defer the drawing of your State Retirement pension then it does not take effect until the date that pension is put into payment.
Now, what precisely is the GMP adjustment? On 6th April 1978 when the Government introduced a form of additional State Retirement pension called “State Earnings Related Pension Scheme” (SERPS), it also introduced a two tier National Insurance Contribution system too – Contracted In rates and Contract Out rates. Employers were allowed to declare whether their company pension scheme was to be deemed a Contracted In scheme or a Contracted Out scheme; the benefit of a Contracted Out scheme is that the company pension scheme fund receives an annual ‘rebate’ from the Government as a reward for taking all of its pension scheme members out of the new additional state pension scheme – SERPS.
What the employer had to promise before the Government would allow a company scheme to be declared a Contracted Out scheme was that its pension scheme would pay a pension of at least the value of the SERPS additional state pension an individual would have earned had they been in the SERPS system. This is called a Guaranteed Minimum Pension (GMP). For all defined benefits pension schemes (that is final salary or career averaging schemes such as those of the Armed Forces) the employer had no difficulty in achieving this criteria and so every defined benefits pension scheme was Contracted Out.
The difference between Contracting In and Contracting Out for the individual pension scheme member is that as a member of a Contracted Out pension scheme you pay a rate of National Insurance Contributions that is 1.4% lower than would otherwise be the case.
Once you have retired and all the while you are receiving your Armed Forces pension and not your State Retirement pension, the whole of your Armed Forces pension is increased annually by the relevant inflation uplift applicable each April. However, once your State Retirement pension comes into payment, it automatically assumes responsibility for applying the increase to the GMP figure as part and parcel of your State Retirement pension, and so the GMP element of your Armed Forces Pension is no longer increased on an annual basis.
The GMP element is recognised on your State Retirement pension award letter and it is described by the rather confusing term “Contracted Out Deductions” (COD). Below is an example of how an annual increase would be calculated with an inflation uplift of 2% for an individual who has a reasonable amount of service prior to 1997:
There is another little quirk in this calculation that throws a spanner in the works too, and that is that all GMP earned from 6th April 1988 has its annual increase capped at 3% so either the full inflation uplift or 3%, whichever is the smaller, is applied to that portion of your pension. I’m not going to add that into a worked example here because it is complicated and there is not enough space on the page!
The system is becoming simpler for younger service personnel because from 6th April 2016 there will no longer be any difference between the National Insurance rates payable – every employee will pay National Insurance at the higher Contracted In rate, no matter what type of pension scheme they have. That is to say, all members of the Armed Forces will be paying a rate of National Insurance Contributions that is 1.4% of your salary greater than the current rate you pay, but remember it will be giving you credits towards the new higher single tier pension of around £151 per week that comes into effect for those retiring from 6th April 2016 onwards, instead of the current £116 basic state pension, which is all the Contracted Out National Insurance Contributions buy you.
If you have questions about your Armed Forces Pension 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 get the most from your Armed Forces pension.
For more information, go to www.ForcesPensionSociety.org
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