Forthe past 70 years, the Forces Pension Society has served the interestsoftheArmedForcesandtheirfamiliesastheirindependent pension watchdog. With four schemes now operating, Armed Forces Pensions have never been more complex, so our Pension Advisory Service is busier than ever,dealing with enquiries from our Members.
of being “contracted out” was that the scheme members pay 1.4% less NICs than is otherwise the case. For example, aSergeant earning £38K paid over £500 ayear less in NICs than somebody earning the same who is ‘contracted in’ to the Second State Pension. From 6th
will cease and everybody in the UK who pays NICs will pay them at the “contracted in” rate.
the 2016 changes to State Pension provision, explaining just how they will impact on you.
I
Recently the Forces Pension Society has been dealing with alot of enquiries about the new arrangement for the State Pension which apply from 6April 2016. The new arrangement –the Single Tier Pension –does not apply to anyone who had reached State Pension age before 6April 2016 but there are implications for younger people which need to be understood. This short article looks at the introduction of the Single Tier Pension as it will relate to current Servicemen and women.
First alittle background. Historically, what we all understand as the state pension was made up of two parts: the Basic State Pension and Additional State Pension (sometimes called Second State Pension –orS2P – which is how we will refer to it in this article), designed to supplement the Basic State Pension. Everyone (save afew very low paid exceptions) paid National Insurance Contributions (NICs) which count towards their Basic State Pension. However the same was not true of the
S2P.Many employers’ pension schemes, including all in the public service and some private employers were ‘contracted out’ of the S2P; this included the Armed Forces Pension Schemes (AFPS). The benefit
nthis article Mary Petley from the Forces Pension Society sets out
So the immediate question readers will ask is “will Ireceive less ‘take home’ pay from 6April this year?” The answer is probably “yes”, because despite alikely 1% pay increase, your NICs will increase by the 1.4% difference, resulting in a0.4% net reduction. This reduction could potentially be obscured by the introduction of the new pay structure that comes into force on the same day.
Between 2010 and up to 5April 2016 individuals needed 30 years to qualify for the full Basic State Pension and every year counted. There was no minimum number of years of contribution before which individuals were not eligible to receive benefits (called a‘vesting period’) –so, let’s say somebody paid 22 years’ worth of NICs at the lower rate and made no further contribution (perhaps he moved abroad), he would be entitled to 22/30th of the full Basic State Pension when he reached State Pension Age.
However,from 6th April 2016 those
who reach State Pension Age on or after that date ‘contracting in’ and ‘contracting out’ status disappears. This means that Service personnel will see:
a. Their NICs increase by 1.4% of pay.
b. The number of years of contributions required to qualify for the full Single Tier Pension increase from 30 to 35.
c. Anyone who has less than 10 years’ contributions in total will not ‘vest’ (or qualify) for anything from the new scheme –this 10 year vesting period applied before 2010 and is being reintroduced for the Single Tier Pension.
The value of the Single Tier Pension to somebody retiring on or after 6April 2016 with 35 years’ worth of contributions at the higher rate is £155.65.
April 2016 this
Asignificant proportion of the national workforce is going to be in the position of having paid NICs for part of their working at the ‘contracted out’ rate and NICs at the new,higher rate for the balance of their working life. If they do not make higher rate contributions for 35 years, they will not get the full £155.65 Single Tier Pension. Further, some people paid the higher rate NICs before joining the Armed Forces or, perhaps, during employment between periods of service. These higher rate contributions will not be ignored in future calculations, as government will have to assess the position of each of us at the point that the Single Tier Pension is introduced.
On 6April 2016 the Department for Work and Pensions (DWP) will conduct avaluation of your current state pension entitlement based on two formulae; entitlement under the old rules and entitlement under the new rules, as if these new rules had been in place on the day you started paying NICs in your working life.DWPwill take the greater of the two rates on that date and classify that figure as your ‘Foundation Amount’. If,on6April 2016, your ‘Foundation Amount’ is lower than £155.65 you will continue to add to this figure all the time that you pay NICs up to your State Pension Age. This will be the position for the vast majority of Service personnel. In order to secure the full single tier award you will need to have paid NICs at the ‘contracted in’ rate for 7½ years at some point in your life before you reach your State Pension Age. Once you reach your State Pension Age you no longer pay NICs –could be the biggest pay rise you ever get…!
If you are amember of the Forces Pension Society and have further questions on this or any AFPS issue, please email us on pensionenquiries@
forpen.co.uk. If you are not amember but would like to learn more about us, visit our website
www.forcespensionsociety.org.
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