AFPS 75 Pension Bombshell

#1
So lets be clear on the pension and commutation issue raised in the thread http://www.arrse.co.uk/cpgn2/Forums/viewtopic/t=76631.html. According to the MOD booklet “AFPS 75 - Your pension scheme explained” dated MMP/106 re-issued Feb 07 which states “The Finance Act 2004 (FA 2004) stipulates that a member’s pension may not reduce from one year to the next except in exceptional prescribed circumstances. Rights to commutation in respect of pension earned before 6 April 2006, when the provisions of FA 2004 came into force, are unchanged, you need to apply no later than 12 months after leaving the service but, for pension in respect of service after that date the commutation decision must be made before the pension comes into payment. To maximise the amount of resettlement commutation you can receive you need to apply before leaving the Services otherwise only service before 6 April 2006 can be commuted

The booklet makes no comment about the fact that the commutation rate has dropped from 50% to 25%. Furthermore, a comment in the FA 2004 seems to have been interpreted in such a way that instead of protecting employee’s rights it disadvantages employee’s rights.

Furthemore by digging around a bit I came across an important note (aimed at the Navy but equally applicable to the Army) which says the following:

“BACKGROUND

1. Personnel leaving the Armed Forces before reaching the age of 55 with an entitlement to an Immediate Pension (IP), other than invaliding benefits, may apply for resettlement commutation.

2. The Finance Act 2004 (FA 2004) made changes to the rules regarding taxation of pensions, which had an implication for members of AFPS 75 who have service after 6 April 2006 in the following two areas:

a. Anybody wishing to commute the element of service after 6 April 2006 must now make the decision to do so before leaving the Service.

b. AFPS 75 capped the amount raised in a lump sum to 50% of the individual’s total pensionable value. This is now reduced to 25% but only applies to any service accrued after 6 April 2006. In the overwhelming majority of cases, 25% of the value of the total pension exceeds, by far, the amount that can be raised by commutation.

3. Although the Finance Act was introduced into law in 2004, the changes highlighted above were not effective until 6 April 2006. Significantly, the guidance notes from HM Revenue & Customs (HMRC) to individual schemes, AFPS 75 included, were not made available until recently, thus prompting promulgation of the change via 2007DIN01-018. The Ministry of Defence has no flexibility in applying these regulations and must comply with HMRC rules.

IMPACT OF CHANGE

4. For the overwhelming majority of personnel (including all ratings) this change does not have any impact at all on the amount of capital that can be raised by commutation, or the terms of recovery. However, those wishing to apply for resettlement commutation must now do so prior to leaving the Service.

The decision to commute pension is a personal one but by doing so the individual should understand that this is potentially an expensive option as the amount of pension abatement to recover the commutation repayment can reduce the amount of annual pension received considerably; there may be more advantageous methods of raising capital than taking this option. It is recommended that advice be sought from an independent financial adviser prior to making any decision on commutation; the White Ensign Association are available to provide pension advice and assistance to all. Alternatively, information about independent financial advisers accredited by the Services Insurance and Investment Advisory Panel (SIIAP) is contained in DIN 2005DIN02-098.

OFFER TO TRANSFER TO AFPS 05

5. This policy amendment occurred after the Offer to Transfer (OTT) exercise and as such the Personal Benefit Statements provided at the time were correct. Importantly, the lump sum possible under AFPS 75 is still, and always will be, greater than the EDP lump sum available under AFPS 05. It should be noted that the value of an individual’s total pension package (pension + lump sum) is not altered in any way by this recent change and there will be no opportunity to re-visit original OTT decisions based on this adjustment.”


It would appear to me that a major change has been imposed upon the pensions of Military personnel without consultation, without full and frank explanation (could they have put something in our pay statements or written a letter?) and it is a change that could have significant impact upon the financial plans of thousands of people.

Cheers mate. Don’t the people at the top know that Loyalty is a 2-way street!

Anyone care to make an offical comment from the MOD?
 
#2
:wink:

It might help if you clearly highlight the areas you believe have been changed without consulatation as I, for one, do not carry the full details in my back pocket at all times.
 
#3
Err, this change ( I assume you mean maximum commutation / pensions commencement lump sum of 25% ) is being imposed by HM Revenue and Customs on all pension schemes.
 
#4
Check para 2 and then try to work out the impact of dropping the commutation rate from 50% to 25% of pension which took effect from 6th April 2006. For many this could have serious implications.
 
#5
Not really, Rubicon; you give up some of your pension in return for PCLS - ie cash. If HMRC let you have less cash, you have more pension.
 
#6
Bravo_Bravo said:
Err, this change ( I assume you mean maximum commutation / pensions commencement lump sum of 25% ) is being imposed by HM Revenue and Customs on all pension schemes.
You are right it has, However no-one in my unit has been told about it. First I heard was when it mentioned on this forum a few weeks ago. Would have been nice if the army actully told us rather than letting arrse tell us
 
#8
Bravo_Bravo said:
Not really, Rubicon; you give up some of your pension in return for PCLS - ie cash. If HMRC let you have less cash, you have more pension.
Again true, but its a tax free lump the pension does get taxed. Some people use that tax free sum to go towards a house, they could be in for an unpleasent shock.
 
#9
this is not as bad as it seems, however i still take umbrage with 2 things,

firstly, that pension forecasts sent out in the OTT packs were incorrect and as such we were mis-informed when making our decision to transfer, so i believe should an individual wish to pursue legal action he would be right to do so.

Secondly, the manner and timeliness in which it has been briefed is disgraceful - i am genuinely disappointed in the MOD for this and will be writing to soldier shortly, i emplore you all to do so too. 3 yrs to publish a DIN and then expect chief clerks to cascade it accordingly is not the actions of a professional organisation.

Finally, i have had this explained to me by somebody very senior who is intimately involved with pensions - the bottom line is that the 25% cap is of the total pension fund including the element of the 'terminal grant' - the terminal grant (12.5% of your pension) will also be paid in full. Almost nobody will lose out, and some people may actually prof.
 
#10
goon_bde said:
Finally, i have had this explained to me by somebody very senior who is intimately involved with pensions - the bottom line is that the 25% cap is of the total pension fund including the element of the 'terminal grant' - the terminal grant (12.5% of your pension) will also be paid in full. Almost nobody will lose out, and some people may actually prof.
This could be true but I seem to remember some quite senior people tell us that no-one will lose out and some people will gain when paycut 2000 came in, Look what happened there.
 
#11
I was under the impression that the Terms and Conditions in force when one signed an employment contract were not changeable unless you gave your agreement. Am I wrong?
 
#12
Perevodchik said:
I was under the impression that the Terms and Conditions in force when one signed an employment contract were not changeable unless you gave your agreement. Am I wrong?
I would think you are right Perevedchik, however, if as someone mentioned earlier this is a Governmental change in Pension policy then it probably can be done without your agreement.

Jimima
 
#13
Now i don't exactly understand all this pension stuff, but i do know i'm on the old scheme and this doesn't look good! Getting screwed over by the govt again - shocking.................... :? :? :? 8O 8O 8O :roll: :roll: :roll:
 
#14
For those people who use army net there is a calculator for working out your pension only they have not updated it yet to show the new payout(still set to everyone getting the 50%), although they say they will soon. If these changes took place in 2006 why hasn't it been yet? Have they contracted it out to EDS?
 
#16
stacker1 said:
Bravo_Bravo said:
Not really, Rubicon; you give up some of your pension in return for PCLS - ie cash. If HMRC let you have less cash, you have more pension.
Again true, but its a tax free lump the pension does get taxed..
Ive recently left after doing my 22, there are no winners in the great untaxed lump sum v taxed monthly pension debate. Although you do get an immediate lump sum which is great if you need that injection of cash, it all equals out:

If you were not to commute any of your pension and took the smaller lump sum and larger monthly amount, when you hit 55 calulate how much tax you paid on your monthly pension

work this against someone else of equal rank who took full commutation, when they hit 55 they work out the difference in what they would have got with the larger monthly pension against the difference in amounts between the larger lump sum and the smaller lump sum.

Thet basically work out the same. So in essence you are actually taxed on the full amount rather than the monthly pension, its just the govt take the difference from your larger lump sum before you see it.

There is only one winner! If my post made no sense then attend a Financial Aspects of Resettlement Briefing, they are the pros and explain it in such a way that even the stupidest thicko would be able to grasp it (which was fortunate :D )
 
#17
Filbert Fox said:
stacker1 said:
Bravo_Bravo said:
Not really, Rubicon; you give up some of your pension in return for PCLS - ie cash. If HMRC let you have less cash, you have more pension.
Again true, but its a tax free lump the pension does get taxed..
Ive recently left after doing my 22, there are no winners in the great untaxed lump sum v taxed monthly pension debate. Although you do get an immediate lump sum which is great if you need that injection of cash, it all equals out:

If you were not to commute any of your pension and took the smaller lump sum and larger monthly amount, when you hit 55 calulate how much tax you paid on your monthly pension

work this against someone else of equal rank who took full commutation, when they hit 55 they work out the difference in what they would have got with the larger monthly pension against the difference in amounts between the larger lump sum and the smaller lump sum.

They basically work out the same. So in essence you are actually taxed on the full amount rather than the monthly pension, its just the govt take the difference from your larger lump sum before you see it.

There is only one winner! If my post made no sense then attend a Financial Aspects of Resettlement Briefing, they are the pros and explain it in such a way that even the stupidest thicko would be able to grasp it (which was fortunate :D )
It also depends what tax band you fall into, My father pays 40% on his wages which means he also takes it in the shorts with his pension as well
 
#18
Filbert Fox said:
If you were not to commute any of your pension and took the smaller lump sum and larger monthly amount, when you hit 55 calulate how much tax you paid on your monthly pension

work this against someone else of equal rank who took full commutation, when they hit 55 they work out the difference in what they would have got with the larger monthly pension against the difference in amounts between the larger lump sum and the smaller lump sum.

Thet basically work out the same.
However you will have money in your pocket for up to 15 years more than the person who did not commute as much.
 
#19
Hypothetical figures purely for example, but this is how it was explained to me.

Soldier 1 - Non Commutation

IP - £10k pa
Terminal Grant £30k

Soldier 2 - Commutation

IP - £8k pa
Terminal Grant £45k

Assuming that both leave at the age of 40 and that at the age of 55 both receive an updated pension. There is an initial annual difference of £2k. That over the 15 years equates to £30k.

£2000 (pa) x 15 (years) = £30,000

Soldier 1 that retires at 40 and does not commute any of the pension will have had £30k over the 15 year period and some £15k more than Soldier 2 who commuted. But that £30k is taxable.

Soldier 2 that commutes the full entitlement has a lower IP, but a larger tax free Terminal Grant

I suppose it all depends on what you want to achieve and what your personal situation is.
Should you want to Jump Ship and bugger off to live as a Tax Exile in a small village somewhere in Asia, then you'll probably want a larger IP.
But If you need to buy a house in the UK, or pay a lump off a mortgage then you'll probably want a bigger Terminal Grant.

Feck me that's confusing, Best advice is to get profesional advice
 
#20
All_I_Want said:
Filbert Fox said:
If you were not to commute any of your pension and took the smaller lump sum and larger monthly amount, when you hit 55 calulate how much tax you paid on your monthly pension

work this against someone else of equal rank who took full commutation, when they hit 55 they work out the difference in what they would have got with the larger monthly pension against the difference in amounts between the larger lump sum and the smaller lump sum.

Thet basically work out the same.
However you will have money in your pocket for up to 15 years more than the person who did not commute as much.
Dependant on your tax status, and bearing in mind the annual difference in Commutation and Non-Commutation, and obviously your ability to find the best deal. You could probably not commutate and borrow the extra to make up the difference in Terminal Grants and still be better off than the commuter.
 

Similar threads

Latest Threads

Top