Guaranteed Minimum Pension increase problems

yabbadoo

Sept 2011 CPI inflation figure is 5.2%, but Guaranteed Minimum Pension (GMP) increases are capped at 3% by Act of Parliament AND paid late.

This is the culprit (my post continues below it)

The Pension Schemes Act 1993

Section 109 - Annual Increase of Guaranteed Minimum Pensions

(1) The Secretary of State shall in each tax year review the general level of prices in Great Britain for the period of 12 months commencing at the end of the period last reviewed under this section.

(2) Where it appears to the Secretary of State that that level has increased at the end of the period under review, he shall lay before Parliament the draft of an order specifying a percentage by which there is to be an increase of the rate of that part of guaranteed minimum pensions which is attributable to earnings factors for the tax year 1988-89 and subsequent tax years for—
(a) earners who have attained pensionable age; and
(b) widows and widowers.

(3) The percentage shall be—
(a) the percentage by which that level has increased at the end of the period under review; or
(b) 3 per cent.,
whichever is less.

MY NOTE - Definition of " review period" in sections (1) and (3a) is 12 months starting 1st Oct in the previous full year. So, the "GMP increase order 2011" made 16th March 2011, for the increase effective 6th April 2011, used the Oct 2008-Sept 2009 CPI increase figure of 3.1%, restricting the GMP increase to 3% as per section 3(b). As Sept 2011 CPI increase is 5.2%, GMP's in 2013 will be 2.2% short.

My post continues -

In 1993 (and for several years afterwards) inflation was below or around 3% BUT when it FIRST increased to over 5% (Sept 2008, CPI 5.2%) the GMP increase was capped at 3%. Even worse, it wasn't paid till April 2010. GMP recipients thus suffered inflation at current rate whilst their income was 18 months in arrears.

18 years ago, this Act was relevant in light of inflation history at the time BUT the financial climate has changed dramatically this last few years, and in my view the Act needs updating. There's millions of people in "contracted out" pension schemes on modest pensions whose income is eroded by this Act.

I'm writing to my MP, but a lone voice isn't going to get much attention, I feel. Has anyone any suggestions to get wider attention?

Meeper

Edited: Pixieboy explained better than me......

Pixieboy

I think you may have misunderstood.
The 2011 increase was based on the rise in the CPI over the 12 months to 30/9/2010. Generally, the scheme pays up to 3% and the balance is paid by the state.
Previous increases will have been based on rises in the RPI to the preceding 30/9, with 2010 being zero as RPI had gone down over the 12 months....
There are copies of the GMP Increase Orders available from the links on the right hand side of this page http://timeline.lge.gov.uk/
and you can look at the CPI and RPI increases over 12 month periods here
CPI http://www.ons.gov.uk/ons/datasets-and-tables/data-selector.html?cdid=D7G7&dataset=mm23&table-id=1.2
RPI http://www.ons.gov.uk/ons/datasets-and-tables/data-selector.html?cdid=CZBH&dataset=mm23&table-id=2.2
It's the Sept values that you will be looking for.

Hope this helps

RichandJ

Pixieboy wrote: »

I think you may have misunderstood.
The 2011 increase was based on the rise in the CPI over the 12 months to 30/9/2010. Generally, the scheme pays up to 3% and the balance is paid by the state.
Previous increases will have been based on rises in the RPI to the preceding 30/9, with 2010 being zero as RPI had gone down over the 12 months....
There are copies of the GMP Increase Orders available from the links on the right hand side of this page http://timeline.lge.gov.uk/
and you can look at the CPI and RPI increases over 12 month periods here
CPI http://www.ons.gov.uk/ons/datasets-and-tables/data-selector.html?cdid=D7G7&dataset=mm23&table-id=1.2
RPI http://www.ons.gov.uk/ons/datasets-and-tables/data-selector.html?cdid=CZBH&dataset=mm23&table-id=2.2
It's the Sept values that you will be looking for.

Hope this helps

Beat me to it. OP, the bit of pb's post I've bolded is the important one. Anything over 3% paid by a scheme is added to an individual's state Additional Pension.

Chorlie

Can someone explain in very basic terms how GMP works, or more comes in to play.

I've retired due to ill health reason, so I got my full Final Salary Pension early (I'm 40). Now part of my pension is linked to GMP, I understand it's now linked to CPI and my former employer pays upto 3% and DWP pays anything above that.

But does it get paid and when, is it added to your state pension and paid from state pension age or does it increase your company pension in anyway since they are paying 3%. Since I've only had my company pension RPI linked increase I guess it's the former. Like I said can someone explain to me how it's paid and how / when will it effect my income.

Thanks

RichandJ

GMP is part of your pension, not in addition to it.

It is (currently) for the purposes of final salary occupational pension scheme increases deemed to come into payment at the old State Pension Ages (SPA) - 65 male, 60 female.

From the first occupational scheme increase after SPA the GMP is split out, so your pension could consist of several tranches receiving differing rates of increase:

Pre 88 GMP - GMP earned before 6/4/88
Post 88 GMP - GMP earned between 6/4/88 and 5/4/97
Pre 97 'excess' - pension earned pre 6/4/88 in excess of total GMP
Post 97 pension - earned, strangely enough, after 5/4/97

This isn't exhaustive but enough to be going on with for now. Increases from the scheme could be:

Pre 88 - nil
Post 88 - CPI (previously RPI) to a maximum of 3%
Pre 97 excess - varies, could be CPI/RPI, could be nil
Post 97 - possibly still RPI to a maximum of 5%, maybe CPI with same ceiling.

The state pays any increase on Pre 88 and any increase on Post 88 above 3%, although how that's going to work when SPAs rise and are no longer in synch with ages 60 & 65 I don't know.

Actual rises will depend on your scheme rules. Prior to you attaining the old SPA the whole of your pension in payment should receive an increase.

Chorlie

Thanks for that RichardJ,

My Final Salary Scheme GMP relates to the period from Jan 1991 to April 1997.

So since I'm only 40yrs old, I guess it won't effect me until I'm 65yrs old, when (if everything stays the same) a percentage of my occupational pension will increase by RPI (upto 5%) and the other percentage of it increase by CPI (first 3% by my former employer and the rest by DWP).

So if fact I may get a bigger increase before I'm 65yrs old than I would after 65yrs old, since all of it is increased with RPI but only some after 65.

Then on top of this I'll get a full state pension (if I get 30yrs NI's, which I should). Less the SPA Deduction from my occupational pension.

But I won't get any increase relating to GMP until I'm 65yrs old even tho I'm getting my full occupational pension?

Chorlie

RichandJ

Your GMP is actually deferred until age 65, however, it will be notionally increasing, probably by a fixed amount of either 7 or 6.25% per tax year until then. Until then it's like a 'hidden' part of the pension you're receiving.

You could ask your scheme administrators what GMP they hold for you at leaving and at SPA. Then you'd know how much would be split out when you hit 65.

The rest of your post sounds about right without me, obviously, knowing your scheme rules.

TableTop

Final salary pension and GMP - very confused

This thread set me off reading other sources and they have not helped my understanding at all, so hope someone can help clarify.

I'm female, aged 58, with a deferred final salary scheme which I'm considering taking in the next few months and which includes a GMP element.
I now seem to read that the GMP part of the pension isnt payable until I'm 60. Is that true, have I totally got the wrong end of the stick, or does it depend on my scheme's rules?

I read that, once in payment, the GMP is increased by my employer up to a max of 3%, and if CPI is more than that it should be made up as part of my state pension. But my state pension is now payable at age 64. So if CPI reaches 5+%, I only get 3%?
Again, have I got this right, or does it depend on my scheme's rules?

(I do have a copy of the scheme rules, but they dont seem to cover this scenario).

Any help much appreciated. I really thought I had got my head round this stuff but the more I learn the more confused I get!

RichandJ

First of all, your GMP is part of your pension, not in addition to it.

That means if your pension is put into payment it will have been increased between leaving and commencement as follows:

GMP - generally by a fixed percentage for each tax year (might be each 6th April) between leaving and commencement. The percentage depends on when you left.

Excess over GMP at leaving - by Section 52a Orders aka the Occupational Pensions Revaluation Order which normally equates to RPI over the number of complete years between leaving and commencement. Subject to a maximum of 5% per annum.

The result of these two calculations are added together and any early retirement factor applied - that will be your early retirement pension (before taking any cash).

However. Before GMP Payment Age - GPA (see my Post #5) the revalued GMP is treated as part of your pension for increase purposes. It is only when you get to GPA that the GMP is split out for increases.

However, again. The GMP at GPA has to be that which it would have been had you not started your pension until then, in other words it is still notionally increasing as in paragraph 3 above. This will be the GMP that then becomes subject to a maximum of 3% (Post 88 GMP only) increases from your scheme.

Any inflationary increase over 3% is paid by the State, BUT not until your State pension comes into payment from your new SPA. Google "Pensions Industry Newsletter Issue 37", I can't post a link as it's a PDF from the HMRC website & look at page 6.

The above is generic, Scheme Rules can differ so this may not exactly mirror what your Scheme does.

TableTop

Thanks Rich.
Not sure this really explains things to me (sorry!) but thanks for trying. Not your fault! I've emailed the scheme as well to see what they say. At the end of the day I really need to know how this affects the £ I receive as I'm trying to decide if its 'better' for me to take a reduced pension at 59 or live on savings til I'm 60 and get the maximum pension.

This may be anachronistic, but I kind-of trust my previous employer to not be 'unfair'. They are a v. visible national co. and I was there from age 16-47, and they still have a place in my affections

Though having my fingers crossed behind my back may not be the best way to approach retirement.
B.