Guaranteed Minimum Pension - (GMP)
As a company, we have advised many clients on their pensions where there is Guaranteed Minimum Pension (GMP, for short), succeeding to meet their objectives when other IFAs have not. We have helped clients with GMP to:
Take benefits early
Take a bigger lump sum
Get a bigger income
Transfer their pension
GMP is quite complex, and often very valuable, and you should not move it without taking advice.
If you have a pension and it has Guaranteed Minimum Pension, there are a number of issues and benefits you may face. Typically, you would expect to find Guaranteed Minimum Pension as part of a final salary pension scheme or a section 32 (buyout bond).
Guaranteed Minimum Pension - How it works
GMP is "exactly what it says on the tin” – it is a guaranteed minimum level of pension. You might have an investment amount relating to it – but GMP is a promised income. Prior to 1997, if you were contracted out of SERPS (Second State Pension) through a final salary scheme, the alternative scheme had to promise a Guaranteed Minimum Pension.
Additionally, the GMP was not "frozen” when you left the pension, it would have been re-valued. So, if you left a scheme, the amount of GMP promised would increase and the rate of increase could be earnings linked or indeed, a fixed amount – depending on the scheme rules.
If it was fixed revaluation, the rates would be as follows for the relevant tax years:
Date of leaving Revaluation rate:
2007 to 2012 - 4.00%
2002 to 2007 - 4.50%
1997 to 2002 - 6.25%
1993 to 1997 - 7.00%
1988 to 1993 - 7.50%
1978 to 1988 - 8.50%
This can often mean that the GMP, although quite small initially, can amount to significant sums. Example: Suppose you left a scheme in 1987 and the amount of income promised for GMP was £1,000 per year. If you turn 65 in 2020, this £1,000 would increase by 8.5% per year. This would amount to around £14,760 per year in 2020.
If you have a final salary pension or section 32 which has GMP and it has a guaranteed income, it is the provider's obligation to provide it; they promised it to you and they have a commitment to you.
Sometimes however, it can be a problem to you as it can mean:
The guaranteed minimum pension could prevent you from retiring early
The guaranteed minimum pension could mean there is no lump sum (or a reduced lump sum)
You might not be able to transfer your pension
You might find that pension funds that do not relate to the GMP, are then used to pay for the GMP
Annuities and GMP
If you have a pension and it has GMP, then you might want to preserve the GMP or indeed, you might want to get rid of the GMP. If you have pre 88 GMP (GMP accrued before 1988) then this is inflation proofed by the State. The cost of securing this is mathematically the same as a level annuity, one that does not increase. This is because the insurance company does not provide the increases. So, you should consider whether you give up this benefit, very carefully.
Similar considerations apply to post 88 GMP (GMP accrued after 1988). However, the provider has to give inflation increases up to 3% per year and any inflation increases above this 3%, are provided by the State.
Shopping around for an annuity when you have GMP does not just mean getting a bigger income. The approach is different. You have to assess first, the cost of securing the GMP. Once the GMP is covered by the pension fund, then you can look at providing the tax-free lump sum. Potentially, if the new provider is more competitive, the lump sum can be increased.
If you want a bigger lump sum, or indeed a bigger income, it might be sensible and possible (but NOT always) to get rid of the GMP. This could mean you get a bigger lump sum and bigger income. But, you would lose the inflation proofing provided by the state.
Indeed the pension flexibilities introduced in 2015, and the ability to take unrestricted amounts offer greater flexibility.
Spouses benefits and Guaranteed Minimum Pension
Similar considerations could apply to spouses benefits. GMP (normally) provides a spouses pension of 50% (an income that halves for your wife/husband). By transferring the GMP out, it could be possible to secure better or worse death benefits for a partner.
Please note: sometimes GMP held by a woman provides no death benefits for a husband and by transferring this, the required type of benefits can be selected.
Without doubt, GMP is one of the most complex areas of pensions. If you have a pension which has GMP, then you should seek advice about your options and you should make sure your adviser has experience in the subject. As a company, we can provide advice on the issues surrounding GMP, your pension and what this means for your circumstances.
If you have a question about GMP or want to chat through what it means for you in more detail, then contact us online or phone 0800 011 2713.
If you can't find the information you're looking for on the website, or you want to know more or have a question, or just want to chat through some details about your pension then please feel free to contact us, without obligation. Either contact us online or call 0800 011 2713.