New AFPS & Compensation Schemes

EARLY DEPARTURE PAYMENTS (EDP) SCHEME

Introduction

The new Early Departure Payments (EDP) Scheme will replace the current Immediate Pension (IP) in the new Armed Forces Pension Scheme (AFPS) for those leaving after age 40 with at least 18 years of service but before the normal retirement age of 55.

Who will be affected by this change?

Those already in receipt of an IP or who are currently serving and decide to remain in the current scheme will NOT be affected by these changes. Only those who choose to transfer to the new scheme or new entrants to the Armed Forces from 6 Apr 05 will receive an EDP instead of an IP.

What is the EDP?

The EDP is an alternative to the IP. Currently officers have to serve 16 years and other ranks 22 years before an IP is payable and pension benefits only accrue from age 21 for officers and age 18 for other ranks. Under the EDP ALL personnel will have to reach age 40 and serve at least 18 years to be eligible for an EDP and pension benefits accrue from the date of joining the Armed Forces. The EDP’s purpose is to provide compensation for those to whom the Armed Forces cannot offer a full career for reasons of fitness or changing skill-set requirements and a measure of financial security for those whose prospects of a second career may have been adversely affected by delaying a change of employment until mid-career.

Why Change?

Inland Revenue proposals¹ will not allow pension benefits to be paid from a tax-approved pension scheme before age 55. The IP cannot therefore be part of the new pension scheme. However, the EDP is NOT a pension. Furthermore, the current IP makes unfair distinctions between officers and other ranks in terms of different accrual rates and qualifying periods. The new system is fair to all.

What will I receive if I transfer to the new Scheme and leave service at the EDP Point?

A tax-free lump sum (EDP lump sum) will be payable equivalent to three times the individual’s accrued annual preserved pension value (this is the same as currently payable under the IP). A taxable income stream will also be payable to the value of 50% of the individual’s accrued pension entitlement (based on final salary excluding additional pay), increasing to 75% at age 55.

What will I receive if I transfer to the new Scheme and leave Service at some point after the EDP Point?

For each year’s service completed after reaching the qualifying EDP point (but before reaching the normal retirement age of 55) the level of income stream payable will be increased by 1.67% but will increase to 75% of accrued pension value at age 55 (+ RPI). Changes to the value of the EDP after age 55 are outlined below. The tax-free lump sum remains the same as stated above.

Example

An individual who completes 23 years’ service (and is at least age 40) will be entitled to an income stream based on:

50% + (5 yrs x 1.67%) = 58.35% of the individual’s accrued pension entitlement.
(This will increase to 75% at age 55.)

Will the EDP payments be increased in line with the Retail Price Index (RPI)?

The payments will remain the same until age 55 (as now with the current IP).

What happens to the EDP at age 55?

The income stream will increase to 75% of the value of the individual’s accrued pension entitlement and will then be adjusted to take account of the changes in the RPI since the point at which the EDP was originally taken and thereafter on an annual basis until age 65.

What happens to the EDP at age 65?

The EDP is no longer payable. Another tax-free lump sum (preserved pension lump sum) will be payable of three times the accrued value of pension at the completion of service but adjusted to take account of changes in RPI since the point at which EDP was taken. The full pension entitlement accrued that had been preserved when leaving the Armed Forces will then commence, adjusted to take account of the changes in the RPI since the point at which the EDP was originally taken and thereafter on an annual basis for life.

Specific examples of payments

A few examples for those leaving at age 40 from a typical range of ranks and using illustrative rates of pay are given below.² (Please read the footnote which explains the basis of the figures for the current scheme.) They use the pay rates effective from April 2003 and the new pension scheme benefit structure.

Why is the EDP lower in value than the current IP?

As the skills that personnel acquire in Service are now generally more marketable outside than they were when the current IP arrangements were introduced in 1973, it is no longer considered that such a generous safety net is required for second careers. The resultant saving has allowed funding of major improvements of widows’ benefits and has helped cover the cost of people living longer in retirement (other public service pension schemes are also having to help meet the additional costs of people living longer in retirement – this is not just affecting the Armed Forces). The EDP will continue to offer a uniquely generous benefit to the Armed Forces, reflecting the special nature of a Service career.

How was the Scheme designed?

The design of the new EDP scheme was undertaken with the close cooperation of the three Service Pay and Manning staffs, as well as the Government Actuary’s Department. A range of options was considered. This included separate models to meet the manning requirements of each Service, variants that placed greater or lesser sums in the earlier or later phases of the EDP period, and differences in the size of the initial lump sum. We also looked at options with either smooth or stepped changes in the level of annual payments.

The design of the scheme has been shaped by a number of factors. In finalising the overall pension scheme design, it had been agreed that the new EDP should cost around one third less than the current IP. In precise terms the reduction in cost is 2% of the pensionable pay bill, where each 1% is currently worth £50 million. This change was agreed in order to free up resources to fund improvements to widows’ benefits and to help offset the rising cost of improving longevity.

What will I receive if I leave Service at age 55 after serving a full career?

An EDP will not be payable. The full career pension and pension tax-free lump sum will be payable in the normal way.

¹ Simplifying the Taxation of Pensions: the Government’s Proposals, December 2003.

² The figures in the table can only be illustrative. The pension under the new scheme will be based on individual final salaries and not on the representative rate of pay for each rank that is used to calculate the current scheme pension. Also officers currently accrue an IP after 16 years and other ranks after 22 years as compared to 18 for both under the new scheme. We have used these points for the current scheme comparisons because they are the earliest point at which an officer/other rank can leave and it is considered that this is the comparison that many Service personnel will draw. For other ranks, the current scheme figures quoted in the table reflect 4 years extra accrual. For officers, the current scheme figures reflect two years less accrual but with the faster accrual rate used for calculating non-PVR retirements in the current pension scheme. The figures for officers under the new scheme use the current PVR rate of pension because this better reflects the even rate of accrual that will operate for the new scheme; under the current scheme, officers who do not leave by PVR benefit from an accelerated rate of accrual up to the Immediate Pension Point.

³ These figures, paid after 16 years, are higher than the figures paid after 18 years for the new scheme. This is because of the accelerated rate of pension accrual available for officers up to the IP point under the current scheme (compensated for by slower accrual after the IP point). It was agreed early in the review that accelerated accrual was not fair on long-servers and was incompatible with wider good practice for pension scheme design.

> Annual Early Departure Payments (% of accrued pension value)

Last Updated: 18 May 04