In last month’s Pathfinder we reassured you that, once you had left the Armed Forces, your Armed Forces pension was index linked. In this article, Mary Petley of the Forces Pension Society explains how it is protected from inflation as it builds during your service.
You will all have been AFPS 15 members since 1 April 2022 and many of you will have protected benefits in either AFPS 75 or AFPS 05. Each scheme has a different method of calculating pensions as they build up during service:
AFPS 75 benefits are based on the member’s rank for pension, their length of service (including any Added Years purchased) and the Pension Code in force on their date of discharge. As all AFPS 75 service is counted in your rank for pension on the date of discharge this is an advantage for those who have been promoted but, for those who haven’t, if pay rises are low there is little protection when inflation is high.
AFPS 05 remedied the concerns about limited pension growth during periods of low pay increases by introducing a Final Pensionable Salary (FPS) formula. FPS is the best consecutive 365 days’ pay in the last 3 years of service, with the earliest 2 years’ pay increased by inflation, as the basis for the calculation. FPS is multiplied by your length of service (including any Added Years purchased) and divided by 70 to arrive at the value of the pension. There is an automatic lump sum worth three times the pension. So, if pay rises are lower than inflation, the figure used will factor in inflation from earlier years. This method applies to AFPS 05 Early Departure Payment (EDP) Scheme calculations too.
AFPS 15 goes a step further. The pension builds up at a rate of 1/47th of pensionable pay for each year of service and, the pension is revalued each year by the Average Earnings factor. The Average Earnings figure is based on Average Weekly Earnings (AWE) figures. AWE is calculated using information based on the Monthly Wages and Salaries Survey, which samples around 9,000 employers in Great Britain. It provides estimates of monthly and annual change for the main industrial sectors and is used to increase (revalue) previous years of AFPS 15 accruals. As AFPS 15 EDP benefits are based on the actual pension earned, this protection feeds through to EDP benefits too.
AFPS 15 offers members the opportunity to purchase Added Pension (rather than the long-term commitment of buying Added Years in AFPS 75/05). Added Pensions contracts last up to a year and, once purchased, the value of the Added Pension bought is increased by the Consumer Price Index each year until they are drawn, and every year thereafter. (You can find out more about Added Pension in November’s issue of Pathfinder which can be found here November 2022 Pathfinder.)
So, in a nutshell, each of the AFPSs is very good – and AFPS 15 is amongst the best in the Public Sector – and each does its best to protect your pension earnings as they grow during your service.
If you are member of the Forces Pension Society and have pension-related questions, contact us at [email protected]. If you are not yet a member but would like to know more about us, visit forcespensionsociety.org.