Select Committee on Defence Memoranda

Appendix 1

  Where F is the percentage of lost earnings to be compensated for. There is no simple formula to work G out directly,

  Most spreadsheets or scientific calculators have a functions which make it simple to work out E and G. For example, in Excel, E can be found using the formula:

= PV(0.03, 55-age, -P) +PV(0.03, 79-age, -P/2)—PV(0.03, 55-age, -P/2)

and G can be found using the formula

= PMT(0.03, 79-age. -ExF)

  The actual GIS payment is the difference between G and the Service Invaliding Pension (SIP).

  Example: An individual aged 23, current salary £20,000 on tariff 7.

  Total present value of lost earnings = £473,542.29

  This is just enough to pay £20,000 per year for the 32 years until age 55 and then £10,000 per year for the 24 years until age 79, assuming a 3% real growth per year,

  Compensation at 50% for Tariff 7 = £236,771.15.

  Annual payment, based on an initial fund of £236,771 growing at 3% per year, paid out at a constant rate over 79-23 = 56 years = £8,780.53.

  So that person would be entitled to a total payment each year of £8,781. If the SIP for that person's rank and reckonable length of service was, say £3,100, then they would get an annual top-up of £5,681 per year in addition to the SIP. This would be increased in line with inflation each year, and would be paid until their eventual death (whether this is before or after age 79).

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