Deferred Pension – Guaranteed Minimum Pension

Hymie · 26 May 2008 at 3:31PM

Thanks for the subsequent replies/posts to my question.

I have not given up hope of getting my pension early, and I am in processes of looking at what I might get through transferring the pension.
Although this does seem a cheat to me – if my deferred pension cannot pay out because it does not meet a minimum requirement, how come this simple maneuver might overcome this issue.

I have a very good idea of exactly how much the deferred pension will pay me – so won’t get ripped off by some slick salesman.

This process could take sometime, but I will post further relevant information once I have anything that might be useful to others.

Retired_I.F.A. · 26 May 2008 at 4:03PM

If you transfer to a section 32 buyout bond issued by an insurance company the plan retains the GMP which the insurance company guarantees so it may still not be payable till the fund has grown enough to cover the GMP.

If you transfer it initially or later on from a section 32 to a Personal Pension the value of the GMP withing the transfer value is thereafter called protected rights and can be had from 50 onwards.(55 from 6/4/2010)

No slick salesmen could possibly rip you off. To conduct a transfer one has to be an IFA with the relevant qualifications to conduct transfers, and must conduct a TVA which compares all the options and should he recommend/ talk/con you into signing up for the wrong product he will be liable for such bad advice till the day he dies. As transfers can be complex many IFA's steer clear of doing such nowadays because if they !!!! it up or the goverment appointed regulators move the goalposts effectively saying it's ok today and not tommorrow as they have done in the past they stand to lose everything, their business their house the lot as there is no limit to their liability.

You biggest problem will be finding an IFA willing to even look into it yet alone conduct a transfer, many will quote you a crazy number as a fee just to be rid of you but they do exist they aint all retired like me.

EdInvestor · 26 May 2008 at 6:02PM

Retired_I.F.A. wrote: »

You biggest problem will be finding an IFA willing to even look into it yet alone conduct a transfer, many will quote you a crazy number as a fee just to be rid of you.. .

Quite so - which makes me wonder why you keep going on about f/s pension transfers when it's highly unlikely that people will be able to arrange them,even if they want to.

Up until recently in some cases a transfer could certainly be justified if the pension scheme was underfunded and the company in trouble, as it was possible to lose the pension.But that's no longer possible with the advent of the Protection Fund.

The new rules on offshore pensions will also resolve the cases of expats who have emigrated and want to take their pension with them.

That doesn't leave many people who would definitely benefit.

Retired_I.F.A. · 26 May 2008 at 6:19PM

I've never ever done a transfer where a reason for such was the security of the fund . It is now and always has been a very minor thought, rarely have I even listed it as a reason to transfer.

The biggest, common to all cases justification to transfer I've dealt with has been the annuity. If the transfer value is fair then the option to choose the annuity suitable for the client or better still drawdown simply blows the final salary schemes annuity out of the water.

Then there's the death benefits to consider, again on the whole far far better if a transfer is taken.

And lastly the one that the regulators scream about as being the most important the yield required to match if that's reasonable and the client is educated / advised about investments then:

That doesn't leave many people who would definitely benefit

.

only 99.9999% at a guess.

Debt_Free_Chick · 27 May 2008 at 3:21AM

Hymie wrote: »

if my deferred pension cannot pay out because it does not meet a minimum requirement, how come this simple maneuver might overcome this issue.

One way is a transfer to a personal pension, where the guaranteed minimum pension will be converted to protected rights. Note that word "guaranteed" does not appear in "protected rights"

If you did this, instead of a GMP which matches what SERPS would have given you, you get "a pension" bought by the value of the protected rights. And this could be less than what SERPS would have given you.

To be honest, it's doubtful that an IFA would advise you to transfer if this were the case, but you can ignore his advice

I'm not suggesting you should actually do this - personally I wouldn't - but it's a decision for you to make, once you have all the facts and options in front of you.

Retired_I.F.A. · 27 May 2008 at 7:32AM

Originally Posted by Hymie
if my deferred pension cannot pay out because it does not meet a minimum requirement, how come this simple maneuver might overcome this issue.

and:

Debt_Free_Chick wrote: »

To be honest, it's doubtful that an IFA would advise you to transfer if this were the case, but you can ignore his advice.

When the employer set up the scheme he had the choice to make it a contracted out (of SERPS) scheme. Choosing to opt out the employer pays less employers national insurance contributions for members and the employed member does too but the scheme must guarantee that the pension is at least as good as SERPS. When you left the scheme you left with two elements of a pension, that which was equal to SERPS the GMP, and the surplus. As the GMP was not payable till the NRD for you to take it now the monetary value of the pension needs to buy you a pension equal to the GMP at 65 and of course at 50 that's going to cost more than it would at 65.

By taking that monetary value of the pension now, known as the transfer value you can put it into as I said before a PP or a S32 where it will be invested according to the investment fund types you choose within either of those types of scheme although in a section 32 the investment choice will be limited to low risk low growth almost deposit like funds as the S32 will still have to provide the GMP in the same way. In a personal pension you control the investment and as such you could put it in lets say xyz's high risk yet potentially high reward Russian emerging small companies fund in another word "speculate" which is really a long shot gamble compared to say abc's footsie tracker fund. As such there is no guarantee within a Personal Pension Plan but you can use the fund to provide an income via drawdown or annuity purchase from age 50. (55 from 2010)

A TVA will show you the different amounts payable on death at certain given ages the different amounts payable as an annuity at different ages and at different assumed growth rates of the investment. Making it far easier to choose which is the best route to take between the pp the S32 and leaving it where it is. It will also give what is known as the critical growth rate which is the % growth p.a needed on the investment to provide the same benefits as the preserved scheme at NRD and at other ages.

If that critical yield which is also inclusive of all fees and or commissions received and charges to manage the investment is considered reasonable by you and the IFA and you understand it all then transferring is the right move to make as you can with reasonable expectation seriously improve you retirement income and death benefits by transferring.

In 70% of cases it's advisable to transfer in the other 30% it's not, mainly because the final salary scheme is giving you a poor transfer value. If they offered what it's really worth then 99.9999% would benefit from transfering. It has nothing to do with the myth that final salary schemes are the best they are not. Not by a very long chalk!

The problem however is that although every IFA who understands transfers also understands Joe Public, and Joe Public can and will at some future date as has been the case with endowment mortgages find that he may have with hindsight made bad investment fund choices at sometime and discovered he is not going to get what he had preserved. He will then scream mis-sale, claim he never understood a word and that the IFA promised him the moon. He will then lodge a claim for compensation which comes out of IFA's pockets.

Understandably few IFA's want to get involved with transfers and see the fees/commissions earnable as being worth less than the potential liability.
Those that do have to be whiter than white and keep immaculate records not only of what was on paper but also of verbal conversations to defend themselves from Joe Public more so than to justify a transfer to Joe Public.

Only IFA's with the relevent qualificaltions can conduct an individuals transfer from a final salary schemes to either a S32's or a PP / SIPP's. If one advises against it you need another who will advise it or the transfer cannot take place.

For those with preserved benefits whether they want to take them early or not transferring is good advice if all is considered properly, For every claim of a mis sale there are thousands who have benefited from such and will continue to do so in the future.

Hymie · 22 September 2008 at 8:08PM

Further to my above posts, in that I am not able to access my deferred company pension (it being contracted out of the state scheme and the amount payable at age 50 being less that the GMP) – I have contacted one of the Pension Release companies that advertise on the TV cable channels.

To cut a long story short – the deal is that they can get hold of the deferred pension pot (paying out 25% now, if you so wish) and invest the proceeds in a ‘money purchase’ pension for you.
Ignoring any cut the Pension Release company may take – it works like this:-
Your deferred company pension will buy you defined benefits on retirement (index linked to inflation). By taking the pot of pension money and investing it, you might be able to beat inflation and therefore get a better pension (than your deferred pension will pay you).

The Pension Release company works out the annual investment return required to match that of your deferred company pension – you can then make a judgement call, as to whether an investment is likely to beat this and therefore worth a gamble.

In my instance, I was advised (by the Pension Release company) that the investment would require an annual return of 13% to match my deferred company scheme benefits. 13% would represent a good return during the boom years of the 80s & 90s – I reckon you would be doing well to get 8% these days, and therefore this option is a non-starter for me.

The downside is that I cannot take the 25% of my deferred company scheme now (as a cash sum), leaving the remainder in the company scheme – it is an all or nothing deal.
On the plus side, the Pension Release company charge nothing for providing this information – they take their cut once/if you invest your pension pot through them.

babababor · 13 November 2008 at 10:28AM

Most interesting facts above, but I am unable to find the answer to my problem.

Left service in 1986 Sept, with a £915 GMP.

Took early pension in 1997. . Annual pension includes the un-revalued £915 in addition to my revalued deferred pension.

I will receive the state pension in May 2009, and am hoping that my GMP of £915 will be revalued for the whole period since I left service in 1986. It is due to be revalued under section 148 orders, which indicates an increase over the period of 213%.

Will I in fact get an increase of 213% (£1948) and who will pay this sum (presumably monthly)

Many thanks

.

MrChips · 13 November 2008 at 11:13AM

Your GMP when you reach GMP age (65 for males, 60 for females) can be no less than the GMP at date of leaving with appropriate revaluation. In your case you state this is S148 orders so your GMP from May 2009 will see an increase of 213.3% to £2,867. This will be paid by your pension scheme as GMP is what your pension scheme guarantees to pay you in lieu of SERPS in return for reduced National Insurance Contributions. Pension schemes are not obliged to pay any increases on GMP accrued before 6 April 1988 once it is in payment, and in practice very few do – although the Government will give you increases so that this keeps pace with inflation going forwards.

While you will see a big increase on your GMP, you may well see a big fall in your pension in excess of the GMP which is currently paid by this scheme. For a lot of people, when GMP kicks in at GMP age, it just replaces other pension they are getting from the scheme so there is no net increase – it depends on the Rules of the scheme.

babababor · 14 November 2008 at 1:45AM

MrChips wrote: »

. This will be paid by your pension scheme as GMP is what your pension scheme guarantees to pay you in lieu of SERPS in return for reduced National Insurance Contributions. Pension schemes are not obliged to pay any increases on GMP accrued before 6 April 1988 once it is in payment, and in practice very few do – although the Government will give you increases so that this keeps pace with inflation going forwards.

While you will see a big increase on your GMP, you may well see a big fall in your pension in excess of the GMP which is currently paid by this scheme. For a lot of people, when GMP kicks in at GMP age, it just replaces other pension they are getting from the scheme so there is no net increase – it depends on the Rules of the scheme.

Many thanks for your reply.

I am however a little confused.

Since the GMP is pre-88, I was of the impression that the increase due to revaluation (ie £2867 - £915) was added to the state pension, and my former employer just continued to pay the original GMP in pension without annual increases.

Regarding your last paragraph, why should I see a fall in my pension in excess of GMP?. This is my preserved pension, increased annually, and surely will continue to be paid in full by my employer.

Finally, I believe the Section 148 orders are amended in January each year (as opposed to following the tax years) so hopefully I will get more than the current 213%increase.

Deferred Pension – Guaranteed Minimum Pension

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