Guaranteed Minimum Pension increase problems

RichandJ · 31 October 2011 at 7:49PM

Just ask the administrator for the full calculation details. To include revaluation, commutation & early retirement factors, deferred pension at leaving split out between GMP & excess & the same split at proposed early retirement date & lastly GMP at age 60.

If it still doesn't make sense come back & ask again. I agree it isn't easy, unfortunately even for some people who do it for a living.

TableTop · 1 November 2011 at 9:01AM

Thank you very much for that Rich, really appreciated.
Having re-read your post above I think I comprehend a bit better this morning.
B.

yabbadoo · 8 November 2011 at 6:24PM

Hi Tabletop - Richard3 has given excellent information and guidance but, though comprehensive, it's STILL not the full story!

A GMP is comprised of two elements - GMP earned prior to 1988, and GMP earned between 1988 and 1997. These two elements are treated differently both before and after retirement, whether or not retirement is early or at State pension age.

I was early-retired in 1998, became a State pensioner in 2007. Between 1998 and 2007. my Co pension was straightforward - increased annually each Nov. in line with RPI inflation, subject to 5% cap.
When I became 65, I was advised that approx 1/3rd of my pension was GMP, so I then received increases on 2/3rds of my pension in Nov (capped at 5%), and further increases on my GMP paid by the Co. each April - allegedly capped at 3% BUT it didn't work out that way, because of the GMP split- see below. I have contacted my pension administrators, who advise as follows -

My GMP earned prior to 1988 is fixed at £2300, and increases on that will be paid by the State. (I have not had any such payment in 4 years to date). Increases on the post-1988 GMP will be paid by the Co each April in line with the annual increase, capped at 3% (the original subject of this thread, the Pension Schemes Act 1993, section 109).

The effect of this is best described numerically, using round nos.
1998 - 2007, Co pension originally £13000, increased in full by RPI up to cap of 5%. In 1998, my GMP pre-1988 was £2300, my post GMP £2000. (so total GMP £4300 in 1998).
BUT - from retirement in1998 to State pension age in 2007, the post-1988 GMP was being increased at the rate of 6.25% p.a.

So, in 2007, my GMP is £2300 p.a fixed plus £2000 increased by 6.25% for 9 years = £3451, total £5551, BUT only £3541 of that gets inflation increase, and that is capped at 3% max.

As I said (using round nos) let's say the average inflation between 1998 and 2007 was 2.5%. Starting at £13000, 9 years at 2.5% gives a 2007 pension of £15452. But, the total GMP element is £5551, so the actual Co pension is £9901. Let's use these figures as if they were current day, to avoid over-complication.

Sept 2011 RPI inflation was over 5%, so the caps come into play. Using the above figures, the increase would be

Co Pension .......9901 + 5% = £10396 (paid from Nov, the scheme date)
Post 1988 GMP 3541 + 3% = £ 3647 (paid from April 2012)
Pre -1998 GMP 2300 + 0% = £ 2300
.................... £15742 ............£16343

The GMP increase capped at 3%) is thus only 1.8% (from £5841 to £5947). NOW perhaps readers will see the point of the original post - the 1993 Pensions act needs updating! 1.8% actual versus 3% cap when inflation is 5.2% - we pensioners are well penalised!

Would also point out that anyone with this level of income (plus State pension) is in the Marginal Age Allowance tax bracket, thus these increases are effectively taxed at 30% (personal allowance reduced by £1 for every £2 over the limit = effective tax rate 30%) so the GMP cap increase is 1.8% gross, = 1.2% net - against actual inflation of 5.2% !!!

RichandJ · 8 November 2011 at 7:15PM

OP, you need to get on to the DWP if the increase to your pre88 has not been added to your State benefits since you attained SPA. It should have been.

Have you had notice of an Additional Pension/Component deduction from DWP ? Again you should have had.

You need to check with them that they are aware that your pre88 contracted out benefit is being paid as part if an occupational scheme.

yabbadoo · 9 November 2011 at 12:17PM

Thanks Richard. My original State pension notification from June 2007 included the following lines - (I'm using round figures close to actual)

Additional pension based on earnings from 6/4/1978 - 5/4/97 £90 LESS Contracted Out Deduction (COD) £105 =£0.00 (my note, difference - £15.00)

in 2008 this became
Additional pension based on earnings from 6/4/1978 - 5/4/97 £95 LESS Contracted Out Deduction (COD)£106 =£0.00 (my note, difference - £11.00)

in both 2009 and 2010, the figures below were applied (that covered the year when Sept inflation was -1.2%, so no Co pension increase)
Additional pension based on earnings from 6/4/1978 - 5/4/97 £100 LESS Contracted Out Deduction (COD)£107 =£0.00 (my note, difference - £7.00)

in 2011
Additional pension based on earnings from 6/4/1978 - 5/4/97 £103 LESS Contracted Out Deduction (COD)£108 =£0.00 (my note, difference - £5.00)

These are WEEKLY figures. I've only just received the breakdown of the 2 elements of my GMP in 2007, the year I became 65. I've workrd out that the 2007 "additional earnings" figure is the total GMP divided by 52, and the subsequent year increases are the addition of inflation on the post-1988 element plus the fixed pre-1988 figure.

I was a contributor to the Co scheme from 1967 - 1998 (31 years) and added my former employer's pension (6 years prior to 1967). Since the total "COD deduction" refers only to the tax years 1978-1997, i assume the COD deduction is the Co pension earned in that period, since my Co pension after deduction of GMP exceeds the figure they use.

AS is clearly shown, the negative difference is diminishing year-on-year. If it progresses at similar rate it will become positive and I should receive a small "additional pension" in the next 2 -3 years.

If I'm correct as to how the "additional pension" figure increases (and the maths appear to support it) I'm totally at a loss to work out how the COD figure increases - the annual increase is at a much lower rate (to my ultimate benefit, so I'm not going to ask!)

xylophone · 10 November 2011 at 12:35AM

There is a clear HMRC explanation here - sorry for format - as a new user I am not allowed to post links!

If you type in http://
dl.
dropbox.com/
u/
452108/
20110217094333898.pdf

you will find an explanation given to a Financial Adviser who made enquiries on behalf of a client. Hope this helps.

TableTop · 10 November 2011 at 9:44AM

Thanks Yabbadoo and Xylophone - I have found both your comments very helpful indeed.

yabbadoo · 10 November 2011 at 11:36AM

To Tabletop - glad to be of help.
To Xylophone - Thank you, that pdf file is extremely informative. It adds significantly to what's gone before in this discussion. To clarify, link to it is
http://dl.dropbox.com/u/452108/20110217094333898.pdf
For other readers -Summary of its content - it descibes in minute detail how the Pensions service work with the Co pensions administrators to arrive at GMP, and the detailed factors of annual increases.

RichandJ · 10 November 2011 at 2:09PM

yabbadoo wrote: »

To Tabletop - glad to be of help.
To Xylophone - Thank you, that pdf file is extremely informative. It adds significantly to what's gone before in this discussion. To clarify, link to it is
http://dl.dropbox.com/u/452108/20110217094333898.pdf
For other readers -Summary of its content - it descibes in minute detail how the Pensions service work with the Co pensions administrators to arrive at GMP, and the detailed factors of annual increases.

Indeed. Very useful, especially for those of us who normally just tell pensioners that DWP will add any GMP increases to their SP.

yabbadoo · 16 November 2011 at 6:01PM

EARLY RETIREMENT - HOW GMP AFFECTS "ADDITIONAL STATE PENSION" at SRA *State Retireent Age) for contacted-out pension schemes, and how inflation rises are calculated (why you get less than you think you should).

Most occupational pension schemes "contracted out" of the State Earnings Related Pension Scheme (SERPS), a scheme to build up additional State pension on retirement.

This meant that employees paid less in NI contributions, but crucially, these schemes had to provide a Guaranteed Minimum Pension (GMP), governed by Acts of Parliament as to amounts and inflation-proofing. These Acts have a significant impact, especially on pre-SRA leavers and early retirees.

All contracted-out schemes are required to report individual employees' GMP data to the Pensions Service. This data ultimately forms part of your State pension.

Two scenarios - (1) leaving a "contracted out" scheme before SRA and deferring pension to SRA, and (2) retiring early on Co pension.

FIRST SCENARIO - say leave at 60 with 30 years service, pension pot £200k, and defers pension to SRA, i.e. 65. Let's also say the pension scheme increases the £200k pot by 3% p.a. (so in 5 years time, it grows to £231854). This scheme is inflation-proofed, capped at 5%.

On retirement at 65, say the annuity rate is 6%, so the pension would be £13911 pa.
And, at age 60, his GMP earned pre 1988 was £3000, and post-1988 £2000 (so total GMP at leaving was £5000).

For the 5 years between leaving and taking the pension, the pre-1988 GMP remains as is, but the post-1988 GMP is increased by 6.25% p.a.(thus £2000 becomes £2708 (and total GMP included in final pension is £5708). (6.25% is the percentage increase when I left - it does vary depending on year of leaving, but is not less than 4.5%)

At SRA age 65, the pension paid by the Co is £13911, of which the GMP element is £5708, the Co pension element is £8203.

A year later, inflation is 5.4%, so the Co scheme increase is capped at 5%.
A 5% increase on £13911 would be £695.55 BUT - due to the aforementioned Acts - there's NO increase on the pre-1988 GMP element £3000, and the post-1988 GMP element, £2708, is capped at 3% (so increase is £81.24) leaving just £8203 to benefit from the 5% increase (£410.15)
So, a nominal 5% increase £695.55 actually delivers just £490.39 !

SECOND SCENARIO early retirement age 60 on pension, same 30 years service, same pension pot £200k.

Using annuity rate 6%, pension would be £12000 (and we'll use same GMP figures as above)
If average inflation over the 5 years 60 - 65 was 3.5%, at SRA the pension would become £14252.
(N.B. GMP's do NOT affect pensions in payment until SRA - Co. pension inflation increases are paid on the full pension up to the overall Scheme cap)

Using the same total GMP £5708, this reduces the Co pension element to £8544, and the same restrictions apply for inflation increase calculations on the GMP.

STATE PENSION NOTIFICATIONS - the Additional Pension" calculation.

The notification includes wording (which changes every year!) but essentially says "pre-1997 additional State pension" - it's sometimes referred to as "Notional additional pansion",
"Less Contracted-Out Deduction (COD)",
then the amount payable (in my case, £0.00 for lasst 4 years).

This "additional State pension" is the difference between what would have been the SERPS pension if NOT "contracted out" and the total GMP actually earned in Contracted-out pension schemes (this info from the Govt website).

The "notional" figure increases annually, but at what inflation criterion I've yet to establish. As already said, the COD is the actual GMP, divided by 52, increasing annually by inflation on the post-1988 element.
The COD is the total of pre- and post-1988 GMP's, divided by 52.

If the difference between the two is negative, (COD > pre-1997 additional pension") there's no addition. If/when it becomes positive, additional State pension is payable.

I've tested/proved the "early retirement" data via spreadsheet using actual figures - it's self-checking in that the calculated results are identical to the actual numbers issued by both my pension administrator and the Pensions Service. Unfortunately it's not possible to "post" spreadsheets - it's much easier to understand numeric data rather than text descriptions! If anyone wants the spreadsheet, I'll give it, no charge.

I'm a retired private individual with no specific pensions expertise. The random questions raised in this thread weren't all fully answered so I researched using my own data, having retired early (in 1999) and now aged 69, so a State pensioner for 4 years.

Guaranteed Minimum Pension increase problems

Comments

Categories

Get our FREE Weekly email full of deals & guides - and it’s spam-free