gmp in pensions

xylophone

I notice that this subject was discussed before on this forumhttp://forums.moneysavingexpert.com/showthread.php?p=11217737.
Your IFA has advised you that the transfer value is poor - have him show you the maths.
Remember that your gmp is being revalued at fixed rate not by full rate S.148 orders http://www.pensionsadvisoryservice.org.uk/workplace-pension-schemes/final-salary-schemes/revaluation

Zelazny

adrob wrote: »

I have now had a meeting with a finacial advisor and he has read the correspondance that i have had from the pru.

Evidently it is a defined benefit scheme and he says the transfer value is way low in comparison to the age 60 or 65 offer, and he puts down the 20% increase in transfer value to the fact that they would rather get me to transfer than to pay me out for the amount that my pension would be.

At time of leaving the gmp side of the pension amounted to £274.04 per annum increasing at 7.5% i was age 29 at this time so what would that make the gmp at 65 i came to a figure of £3444.
pru have a figure of £3204

At time of leaving money in excess of gmp was £741 growing at rpi to max 5% no idea where that would get to but pru total pension forecast is £5800 at 65

seems to me that there is no way that 4.5 years of government pension would pay out £3444 or even £3204

The GMP revaluation is 7.5% per year, but it is applied in April and is not applied in the April prior to your reaching State Pension Age (so you'd likely have 1 less year than you calculated, which would explain the figure given by Pru).

If you happen to have details of your contracted out earning for the years in question I could check the figure provided for the GMP. Bear in mind though that the figure they quoted was £274 per year when you left, which doesn't sound unreasonable. It is becoming a lot bigger solely because of the fixed 7.5% increase applied each year. Compound interest is a powerful thing!

jh2009

I’ll try and show you what I think your situation is.

Your benefit at leaving looks like £1015.04 pa, made up of:

GMP £274.04
Excess £741.00

Total £1015.04

You had 4 years service, so that ties up with a salary of around £15,250k when you left? The calculation may have been 4 years service / 60) times £15250 = £1016.67, (close to the above).

The benefit revalues as follows

GMP of £274.04 at 7.5%
Excess of £741 at min of RPI/5% pa.

The GMP Revaluation is fixed for life at 7.5%. When this rate was set, inflation was higher, so an assumption was made that inflation in the long term would average at 7.5%. In reality in the last 20 years inflation has rarely exceeded 5%, so you benefit from the 7.5% overall. (People who left schemes in later years received lower fixed rate guarantees reflecting lower expected future inflation)

You have said you were 29 at leaving. To keep it simple, I’ll ignore spare months and assume that means you had 35 full years until 65.
So assuming fixed increases of 7.5% for GMP, and if we assume RPI was 2.5% each year from 29 to 65, your estimated pension at 65 is:

274.04 x 1.075^35 = £3444.37
£741 x 1.025^35 = £1758.55

Total £5202.92 at 65

I assume you’re either 50 or approaching 50, so the scheme early retirement factor in the scheme I work in is 0.375 (to reflect an extra 15 years of payment - your scheme will use a different factor but i'll use mine to give an illustration of how it works).

So an early retirement pension of £5202.92 x 0.375 becomes £1951 per year.

BUT…. The scheme has a legal responsibility to pay you £3444 pa from 65, so it has to assess whether this £1951 (or any lower pension if you were to take some of the 1951 as cash) will increase to AT LEAST 3444 at 65.

If it does then you can take early retirement, if it does not, then the scheme will not let you take early retirement, as if it did , then it would have to make up any shortfall at 65. (eg if your pension at 65 was only £3000, then the scheme would have to “top up” your pension to £3444 at its own cost). Any extra cost arising in this way would come from the scheme, so technically your early retirement would be subsidised by other members of the scheme. This is why the scheme has said no to your early retirement request.

Looking at the early retirement of £1951, they will assume future increases are say 2.5% for the next 15 years to 65 (they have to make a guess at this, future increases could be higher/lower).

£1951 x 1.025^15 is 2826 pa at 65, which is less than the 3444 they must pay you at 65, hence why they would not let you take your pension at 50.

I should state that all of the above is calculated using the early retirement factors/method used by my scheme, and the figures you have provided and im guessing you are 50, and an assumption you are protected from the 55 minimum retirement age change. The method/factors used by your scheme will be different so what I’ve said is just an illustration to help your understanding.

On a couple of other questions.

1. The scheme says I can take it at 58, but not earlier, whys this?

This is an estimate of when the scheme thinks the above calcs will "break even" allowing early retirement. EG if early retirement pension 58 is estimated as £2897, then 2.5% increases for 7 years makes this £3444 pa (equal to the GMP) at 65. BUT….Forecasting this is very difficult as it will be based on future factors/RPI increases which could be higher or lower.

2. Why has the the transfer value gone up 20% and my benefit not gone up 20%.

Defined benefit transfer values are technically the cost of providing your benefit in the scheme. So It now costs 20% more to provide your benefit in the scheme. It’s a bit like the price of something in a shop – if the prices falls or rises 20% its still the same product, no different, and same applies here. In theory the transfer value should buy the same benefit elsewhere. In reality for various reasons this is easier said than done especially as many believe defined benefit transfer values are poorly valued. Your financial advisor has already sort of pointed this out in his analysis. Generally it will be take it or leave it with this value as schemes have to treat all members fairly and can't individually negotiate transfer values as any higher transfer value would probably end up being funded by the members who remain.

adrob

Many thanks jh2009, a highly informative reply. and many thanks to everybody else, I finally feel like I ve some understanding of the situation, no thanks pru you really do like to keep people in the dark.

I ve now requested a full set of the scheme rules and also an earlyest possible retirement age from the pru, and pointed out to the pru that my ifa says the transfer value will no where near buy me the pension I m supposed to get at 65. Now awaiting their reply.
Also asked if gmp can be separated from excess.

Seems that I ve been fortunate to have a grossly overvalued gmp only prob is its preventing me from retiring an starting my new life in bulgaria well away from the uk government.
My advice to the uk government is finish gmp restrictions and let people like me stimulate the world economy with our pensions, it is our money after all and it was never intended to build up so far in front of inflation

dunstonh

and pointed out to the pru that my ifa says the transfer value will no where near buy me the pension I m supposed to get at 65.

That is very common and it doesnt matter. If it is short, Pru have to make up the difference and you get the guaranteed income.

My advice to the uk government is finish gmp restrictions and let people like me stimulate the world economy with our pensions, it is our money after all and it was never intended to build up so far in front of inflation

it is not your money. It is held under trust. It ceases to be your money the minute you put it in a pension. Typically, most or all the money in the pot was funded by the employer or Govt. Also, what you want to do would not help the UK Govt. You will not be a voter or a tax payer. Bulgaria would like it though.

ffacoffipawb

adrob wrote: »

At time of leaving the gmp side of the pension amounted to £274.04 per annum increasing at 7.5% i was age 29 at this time so what would that make the gmp at 65 i came to a figure of £3444.
pru have a figure of £3204

Count the number of 6th Aprils between your date of leaving and age 65.

Deduct 1 as there is no 7.5% revaluation on the 6th April prior to 65.

NB: £3,204 x 1.075 = £3,444

You have addded one year too much revaluation. Pru have done it correctly.

adrob

well i requested a few clarifications from pru
Supply me with copy of scheme rules?
none received
Tell me earliest date that will meet gmp?
cant tell me
but we will give you a new retire at 60, now £3600
Can i separate gmp from excess?
No you cant
Two things still bother me am i held by the pru s deferred annuity rules or do my pension scheme rules still apply? i know the retire at 50 still applies
and why cant they estimate my earliest retirement age when they can happily estimate my payout at 60?

Zelazny

adrob wrote: »

Two things still bother me am i held by the pru s deferred annuity rules or do my pension scheme rules still apply? i know the retire at 50 still applies
and why cant they estimate my earliest retirement age when they can happily estimate my payout at 60?

I'm not sure how the Pru do it, but when I worked in pensions admin we could provide a forecast, but it was an estimate only based on averaged increases to the RPI. They could use these to estimate when you might be able to take your benefits (i.e. when the GMP would be covered) but it's a more complex calculation (you either have to use trial and error to find a date where the GMP is covered or come up with a slightly more complicated formula to look at how the benefits increase separately and together) and it would cause them more headaches than it would solve.

If they came back and said "according to our forecasts, you could retire from next April" and then next April it turned out that you couldn't retire, then you'd be annoyed and might complain, and they'd have to run more quotes and calculations. If it went the other way and it turned out that you could have retired earlier, again you might complain and cause them rather more paperwork than they'd like. As the chances of them being spot on are about as likely as me winning the lottery, they've probably got a policy of just saying nothing.

adrob

Well here we are again,
just had a call from another pension provider who were after the buisness. They ve now decided that due to the guarantees built into my existing pension they couldnt acept the transfer of my pension as it may leave them open to a poor advice claim so the prospect of getting over £4000 for the transfer into a sipp has gone :0(

Anybody got any idea when this gmp will equalise, my best estimate is bettwean age 56 and 58 depending on rpi.
the gmp is around £3200
value in respect of gmp is £24730 increasing at 7.5% pa
excess is £29421 increasing at rpi to a max of 5%
come on geniuses have a punt lol

If £54200 was put into an annuity for a 52 year old person what would the best payout obtainable be for immediate retirement ? can only get answers on 55 or above