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The New State Pension Beware,

The Sting in the Tail

The Government has produced a White Paper proposing major changes to the State Pension that are likely to be in place for those reaching their state pension age from 6 Apr 17. This means that Service personnel currently on active duty and even the vast majority of those leaving the Armed Forces today will be affected by the proposed changes. What are these changes exactly, and how are they likely to impact on the Service community? Lieutenant Commander David Marsh, the Pensions Secretary of the Forces Pension Society takes an in-depth look.


ith the odd exception, everybody leaving the Armed Forces today will not be eligible

to receive their State Pension until after the proposed changes to the State Pension system come into force in Apr 17. Therefore, it follows that these changes are going to affect everybody who is serving today (except a small handful of individuals who are already aged 60 and continue to serve).

The most significant change is the switch from a full Basic State Pension (currently £107.45 per week) plus Additional State Pension that may have been earned over one’s working life through such schemes as the Graduated Pension Scheme, (expired in 1978) SERPS (life span from 1978 to 2002) and the most recent successor to SERPS, the State Second Pension Scheme, to a new, single maximum State Pension, currently estimated to be £142.70 per week. That is an increase of £1,833 per year above the current Basic State Pension.

The second change of significance is that from Apr 17 serving personnel will have to pay a higher rate of National Insurance Contributions (NICs). Members of the Armed Forces will, throughout their service career up to Apr 17, have paid Class One NICs at the ‘Contracted Out’ rate. That means to say that as members of the Armed Forces Pension Scheme you have not been paying a level of NICs that entitles you to credits towards any Additional State Pension, only the Basic

38 Envoy Spring 2013

State Pension. On the plus side of paying only the ‘Contracted Out’ rate of NICs, deductions have been 1.4% lower than would otherwise have been the case.

From Apr 17 the will be no such thing as a ‘Contracted Out’ rate of NIC and so all personnel serving from that point onwards will see their NICs increase by this percentage. Now, that might sound a bit mean, but if you wanted, at age 65, to buy an annual pension of £1,833 that was fully index-linked, you would need to have saved £53,600. Nobody serving today will have paid that amount of NICs at 1.4% deduction from their salaries before they reach state pension age – so you are certainly not being treated unfairly.

Furthermore, I want to dispel the myth that this increase in NICs is only going to affect the Armed Forces, as some newspaper reporters would have you believe – far from it. Every individual in the UK who is a member of a Defined Benefit Final Salary or Career Averaging pension scheme will be in exactly the same position, which includes just about everybody in the public sector (including Members of Parliament) and more in the private sector.

So what else is going to be new? To begin with, there will be a longer period for which NICs need to be made in order to qualify for the full new single State Pension award. Currently one has to contribute NICs for 30 years in order to qualify for the full Basic State Pension; from Apr 17 the qualifying period will be 35 years. This is not going to alter the price of fish for the majority, since most of us will pay NICs for

longer periods than that. However, it will be of importance for those who will not have contributed NICs for 35 years prior to exiting the Services, and decide either not to work (for whatever reason), or to emigrate overseas and look to purchase the ‘missing years’. Either way, I go back to my earlier paragraph on the cost of providing a similar pension in the private sector – the cost of purchasing those ‘missing years’ will be far outweighed by the pension value you will receive and will be one of the best investments you will ever make.

Another change is the re-introduction of what is termed a ‘vesting period’; that is to say, you have to contribute for a period of time before you receive any benefit from the State Pension system. The White Paper proposes a prolonged ‘vesting period’ of between seven to ten years. Given that the White Paper conducts all of its modelling on a ten year ‘vesting period’, it could be assumed that that is what it will be. What does this mean? It means you will

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