Guaranteed Minimum Pension/early retirement

peterwolf1

I have a deferred pension from an ex-employer: the normal retirement age is 65 (in 2012). However, they offer an early retirement option. I asked for a quote for this and was told that they have to pay me a statutory GMP at 65 (because I was contracted out of SERPS). They calculated that if they pay an early retirement pension now my funds will not increase sufficiently to meet their GMP obligations in 2012.
Surely, they would have to find the funds to pay this GMP in the scenario where I don't take an early retirement pension but their pension fund does not grow sufficiently to cover the GMP anyway. I feel they are making an excuse not to pay my pension early.
It's my pension after all, I don't see why I cannot benefit from it now (I'm 61) rather than at 65.

MikeJones_2

Hi peterwolf1,

What you have described is legal.

I deduce from your post that you ceased to be an active member of this scheme many years ago – probably before 1986 (or sometime shortly thereafter, say between 1986 – 1990?)

Therefore, either:

(a) the whole of your preserved pension is made up of Guaranteed Minimum Pension when you left service, or
(b) most of your preserved pension is made up of Guaranteed Minimum Pension when you left service.

Why do you have a Guaranteed Minimum Pension?
From 6th April 1978, the State Earnings Related Pension Scheme (SERPS) was introduced which provided a benefit in addition to the Basic State Pension for employed persons who make contributions between an upper and lower earnings limit, determined by the Government.

When an occupational pension scheme decided not to participate in SERPS, the scheme was said to be 'Contracted-out'.

The DSS maintain a record of the minimum SERPS pension at State Retirement Age that a member would have received from the State had the member not been Contracted-out. This is called ‘Notional GMP’.

From 6th April 1997 onwards, the future accumulation of GMP’s ended. Any GMP earned before 6th April 1997 has to be maintained, safeguarded, effectively ‘ringfenced’ and clearly identified. Schemes may continue to contract-out after 5th April 1997 either on a money-purchase basis or under the Reference Scheme Test.

During the time YOU were a member of your company pension scheme it appears that you were Contracted-out of SERPS. Therefore, you accumulated a Guaranteed Minimum Pension (GMP) which is the pension that is provided as the SERPS replacement. And this MUST be paid to you as an absolute minimum from State Pension Age.

Increases to your Guaranteed Minimum Pension (GMP)
When you ceased to be an active member of your pension will have included a ‘Guaranteed Minimum Pension as Date of Leaving Service’.

Your pension scheme must increase your GMP up to State Pension Age by a specific amount if it used 'fixed rate revaluation' – and this interest rate will depend upon the date you left service. This is worked out by compound interest for each complete tax year between the date you left and your State Pension Age. The ‘revaluation’ rate (this is the term given to increases before retirement) could be:

- 8.50% if you left before 6th April 1988
- 7.25% if you left after 5th April 1988 and before 6th April 1993
- 7.00% if you left after 5th April 1993 and before 6th April 1997
- 6.25% if you left after 5th April 1997 and before 6th April 2002
- 4.50% if you left after 5th April 2002 and before 6th April 2007
- 4.00% if you left after 5th April 2007

Your predicament (an example)
Let’s assume you left your former employer on 4th February 1984 and that your Normal Retirement Date (which for you coincides with your State Pension Age) is 65 on 7th July 2012.

Let’s also assume your preserved pension is made up entirely of Guaranteed Minimum Pension at your Date of Leaving Service was £1,000 p.a. (as at 4th February 1984).

You revalued GMP at your Normal Rertirement Date (SPA) will be:

£1,000 p.a. x 8.5% x 28 complete tax years = £9,818.22 p.a.

(i.e. the first complete tax year started on 6th April 1984 and your last complete tax year before your SPA would end on 5th April 2012 – making 28 whole tax years).

Early Payment
Within your Scheme Rules it will define the terms of whether and how early payment is permitted and calculated. These can be complex but we’ll look at a very simplified example.

Let’s assume that the rules say that ‘…early payment is possible, from age 60, with a 3% p.a. reduction applied to your estimated pension at Normal Retirement Date.'

We know that your (example) pension at NRD is £9,818.22 p.a.

If the scheme applies the early payment penalty to this of 3% p.a. (simple interest), there would be a 9% reduction to your pension because you’re taking it earlier:

£9,818.22 p.a. x 9% = £883.63 reduction

So, your reduced pension for early payment would be:
£9,818.22 - £883.63 = £8,934.59 p.a.

Pension Increases to Pensions in Payment (called ‘escalation')
Let’s assume that your Scheme Rules state that pensions in payment (between early payment and NRD) ‘escalate’ by the rate of inflation, measured by the Retail Price Index (RPI), on your entire pension until NRD.

You’re taking your pension now in 2009, so your first ‘escalation’/increase say, is in 2010 and with inflation of 1.1% (example) your pension increases to £9,032.87 p.a.

If inflation in 2010 is 3.1%, your pension would increase to £9,312.89 p.a.

If inflation in 2011 is 2.7%, your pension would increase to £9,564.34 p.a.

This assumes you’d get all three increases, which might not happen depending upon when the Scheme Rules state increases are applied.

Pension below GMP
Your pension at 65, because you’re looking to take it early, has ended up £9,564.34 p.a. – £253.88 p.a. LOWER than your legal entitlement.

If the Scheme Rules state that early payment is not possible if your pension at State Pension Age is lower than your revalued GMP then that it – you can’t take it early because it would breech the Rules and I suspect this is what is happening in the situation you have described.

Not every scheme does it this way and there are many other factors which could impinge upon this example, but I hope it demonstrates ONE set of circumstances under which a scheme would legally be entitled to refuse you early payment.



Perhaps not exactly what you wanted to hear, peterwolf1, but I hope that helps.

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

Tibbledom

A good and full reply by Mike Jones.

It is possible that even though you can't retire now you might be able to retire at some time between now and age 65 (especially if you left after 1/1/85). For example at age 63 (say) the early retirement pension may be sufficient to cover the GMP at 65.

When was you date of leaving? How much was your deferred pension at leaving and how much of this was your initial GMP? What early retirement reduction is applied by the scheme? What increases apply to your pension in payment? Any other info on the increases to the deferred pension would also help.

In theory you MAY be able to transfer your benefits to a personal pension and take immediate payment of those payments, however even if this is possible this is very rarely a good idea because the transfer paid across won't represent good value for money usually.

Hymie

Peterwolf1,
You have fallen foul of exactly the position I find myself in. Some time back I posted a question in relation to this, you can find it here:-
http://forums.moneysavingexpert.com/showthread.html?t=853529&highlight=guaranteed+minimum+pension
For all the financial experts explaining why it is legal – it is undoubtedly a stitch-up, since no mention was ever made as to why I might not be able to take early retirement. In fact the opposite was promoted, that I could take early retirement with applicable reduction. No mention that this would never be possible due to the GMP.

Debt_Free_Chick

peterwolf1 wrote: »

I have a deferred pension from an ex-employer: the normal retirement age is 65 (in 2012). However, they offer an early retirement option. I asked for a quote for this and was told that they have to pay me a statutory GMP at 65 (because I was contracted out of SERPS). They calculated that if they pay an early retirement pension now my funds will not increase sufficiently to meet their GMP obligations in 2012.
Surely, they would have to find the funds to pay this GMP in the scenario where I don't take an early retirement pension but their pension fund does not grow sufficiently to cover the GMP anyway. I feel they are making an excuse not to pay my pension early.
It's my pension after all, I don't see why I cannot benefit from it now (I'm 61) rather than at 65.

It's not about "finding the funds" to pay the GMP at age 65 - it's that your early retirement pension, reduced, plus increases to age 65 will be less than your GMP. Here's an example.....

Let's say your GMP at age 65 is £3,000 and your total pension is £4,000. So, at age 65, your pension is sufficient to cover your GMP.

You take early retirement and your reduced pension is £2,000. If they pay that pension to you now, then even with increases, it has to be at least £3,000 when you reach age 65.

Essentially, a large part of your pension is GMP and you need a good part to be non-GMP to make early retirement a viable option. Blame the government as there is no option to take a State pension, including a GMP, early.

There is no reason for a pension scheme to avoid paying pensions early, where possible - it makes no difference whether you have a larger pension payable at an older age or a smaller pension payable at a younger age - assuming that the early retirement terms are neutral and not generous.

EdInvestor

Tibbledom wrote: »

In theory you MAY be able to transfer your benefits to a personal pension and take immediate payment of those payments, however even if this is possible this is very rarely a good idea because the transfer paid across won't represent good value for money usually.

This is true these days because with-profits funds (in which these pensions are usually invested) have done poorly in recent years.

But it is worth doing the maths, as the fact the pension will be paid for perhaps five more years may make up some of the difference.

Investment of the fund ( if it is put into drawdown) and the tax free cash may also enable it to increase at a more rapid rate than in the lifecos WP fund, further closing the gap.

Of course you will lose your guarantee, but if you are not too risk averse and have some confidence in your investing ability, it may be worth looking at the alternative.

peterwolf1

I wrote to Mr James Purnell, the Secretary of State for Work and Pensions today asking him to relax the rules re GMP. I urge other users in a similar situation to write to him also. Many thanks for your informative and detailed replies.

MikeJones_2

Hi peterwolf1,

peterwolf1 wrote: »

I wrote to Mr James Purnell, the Secretary of State for Work and Pensions today asking him to relax the rules re GMP. I urge other users in a similar situation to write to him also. Many thanks for your informative and detailed replies.

From 6th April 2009, occupational pension schemes will have the ability (through new legislation), to convert GMPs into an equivalent scheme pension.

The legislation provides that scheme member would have to be consulted.

However, it is a widely held belief that because many schemes have yet to equalise GMPs for males and females, that few will avail themselves of the new legislation.

It will be interesting to watch how this develops.

If you're interested, here's the DWP Consultation response from January 2009:

- GMP Conversion - Government response to the Consultation (DWP) (pdf- 13 pages)

Hope that helps.

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

peterwolf1

petitions.number10.gov.uk/RelaxGMP/

Please use the above link to sign an online petition to the Prime Minister to relax the regulations re Guaranteed Minimum Pensions (to enable pensioners to benefit before the State Retirement Age).

Many Thanks for your support!!!!!

LizzieS_2

EdInvestor wrote: »

This is true these days because with-profits funds (in which these pensions are usually invested) have done poorly in recent years.

But it is worth doing the maths, as the fact the pension will be paid for perhaps five more years may make up some of the difference.

Investment of the fund ( if it is put into drawdown) and the tax free cash may also enable it to increase at a more rapid rate than in the lifecos WP fund, further closing the gap.

Of course you will lose your guarantee, but if you are not too risk averse and have some confidence in your investing ability, it may be worth looking at the alternative.

The GMP element would be converted to Protected Rights and that cannot be taken before 65, which restricts the remaining transfer value to the options above.

MikeJones_2

Hi LizzieS,

LizzieS wrote: »

The GMP element would be converted to Protected Rights and that cannot be taken before 65, which restricts the remaining transfer value to the options above.

Since the introduction of pension simplification in April 2006, Protected Rights can be taken at any time from age 50 (rises to age 55 from 6th April 2010).

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.