Pension Transfers and Guaranteed Minimum Pension

nobody999

Currently, I have a pension with my current employer; it has 25 years of final salary entitlement based on my final leaving salary and since 2015 a Defined Benefit element which also includes all of the Voluntary additional contributions.
I also have an old (pre 1990) final salary pension from a company whose funding is ok, according to the scheme rules I am entitled to take my pension from age 50 with an actuarial reduction.
I am hoping to retire in just over 2 years at 55 and take my current pension.
I enquired about the transfer value of the old pension and it is in the region of £100k. I enquired with an IFA about transferring this to my current pension and the advice was don’t bother, you are just merging two pots into one and risk losing some benefits from the old scheme, just take both pensions at 55, great, understood, happy days.
I then enquired with my old pension as to the benefits at 55 . The response was that the pension opted out of SERPs (which I knew) and the benefits at 55 will be lower than the Guaranteed Minimum Pension of the scheme and that I am not likely to be able to take the pension till 60. I am less bothered about a slight delay in taking the pension than the uncertainty, there is no guarantee that the GMP will be matched before 65
I understand the rationale regarding the GMP however:
1.As I have another larger pension and have topped up NI payments meaning I’ll get a full state pension at 67 the GMP is largely irrelevant for me, is it open to me to make this argument or are the Pension trustee’s hands tied?
2.The calculation of when I will hit the GMP is apparently based on a growth rate of 2% whereas under the pension rules the deferred benefits rise by at least 5% per annum, is the scheme required to use the lower % in it’s forecast rather than the scheme rates?
3.Does the GMP aspect effectively prevent any transfer of the pension value even if I pay for and can get an IFA to sign it off?
4. The GMP element is only approx. 25% of the pension, does the GMP prevent me taking the non GMP part earlier?


Appreciate that’s a lot of questions , for which I apologise, I would happily put the questions by phone to the pension team at the old scheme but they default to written communication which is very far from clear, it is in stark contrast to my current pension supplier.
Thanks in advance for any thoughts

hyubh

I enquired with an IFA about transferring this to my current pension and the advice was don’t bother, you are just merging two pots into one and risk losing some benefits from the old scheme, just take both pensions at 55

To be honest, I'm a bit surprised at such a blase response, assuming both schemes are not public sector DB. Not that transferring would obviously make any more sense otherwise, but the issues would be much more complicated - public sector DB pensions are deliberately designed to be easily transferable between each other, and their special treatment of GMP is (as it happens) one aspect of that.

I then enquired with my old pension as to the benefits at 55 . The response was that the pension opted out of SERPs (which I knew) and the benefits at 55 will be lower than the Guaranteed Minimum Pension of the scheme and that I am not likely to be able to take the pension till 60. I am less bothered about a slight delay in taking the pension than the uncertainty, there is no guarantee that the GMP will be matched before 65

The scheme has to pay your GMP at your GMP age (60 if you are female, 65 if male). What it does before then is down to the scheme. As you left before 1990, then assuming fixed rate revaluation (is that the case?), the GMP is increasing by either 7.5% or 8.5% per year, depending on when exactly you left, and will continue to do so until GMP age. Presumably this has led to your GMP becoming outsized, compared to if it had all revalued under the scheme rules, so the easiest thing for the scheme is just to say, wait until GMP age.

As I have another larger pension and have topped up NI payments meaning I’ll get a full state pension at 67 the GMP is largely irrelevant for me, is it open to me to make this argument or are the Pension trustee’s hands tied?

The latter to the extent you can't give up your GMP, however the argument doesn't quite make sense. Under the old system, to 'top up NI payments' wasn't a means to counteract your contracted-out deduction, since the idea was that you couldn't have the benefit of both the GMP and the SERPS you would have had, had you not contracted out, as that would be unfair on those who were contracted-in (SERPS accrual wasn't open-ended).

Conversely, if you mean you are now paying NI under the new system, then any additional state pension above the old basic you are therefore accruing is on top of any GMP under the old system. As such, if you gave up your GMP, you would just be giving up income for nowt.

The calculation of when I will hit the GMP is apparently based on a growth rate of 2% whereas under the pension rules the deferred benefits rise by at least 5% per annum

Are you sure - you don't mean inflation up to 5%? If you are sure, then isn't that even more reason to keep the pension deferred (preserved) until NPA...? The pension increases in payment may be different - how do they compare...?

is the scheme required to use the lower % in it’s forecast rather than the scheme rates?

Assuming you are right that you have 5% guaranteed, then it's possible the administrator has not got this correct and assumed you were in a different section with (say) statutory revaluation due only - I'd double check with them.

The GMP element is only approx. 25% of the pension, does the GMP prevent me taking the non GMP part earlier?

Up to the scheme - what they must do is pay the GMP due at GMP age.

xylophone

If the GMP was not covered, your current scheme may well have refused to accept a transfer in.

nobody999

Thanks for the advice
Re the IFA, I rang them to ask about charges and this was their advice following a 10 min conversation, they would have happily taken my money and gone through it in detail but they were cautioning that I needed to consider whether it was a good use of my money.
Re the GMP if they are bound to apply 7 or 8% to the figure I can't see in the current economic climate it ever catching up before 65, however there may be an opportunity to take the rest of the pension separately particularly as the scheme rules for the other bit (which I contributed to) specifically allow one to take the pension early, however this will be up to the discretion of the trustees.
Re the inflation factor applied to my benefit, on leaving, it is specified as the the RPI or at least 5% whichever is the higher, this appears to be quite common in older financial services pensions (this isn't a public sector pension), in my current co, colleagues who are on an older pension than me have this written in, I suppose that back in the 80s it was inconcievable that inflation would be below 5%. The GMP looks to be separated from the rest of the pension rules so the 5% may not apply to it
Re NI contributions, I take your point, what I meant was that I have checked and currently have enough contributions to obtain a full state pension, but as you say the GMP goes on top of that and if they have to apply a 7/8% growth rate to the eventual benefit that is a good return on investment.
Fortunately the sums involved are not critical to my early retirement so I can afford to take a holistic view. I think what I could do with is paying to sit down with an IFA and get some wider general advice as against the specific transfer sign off advice, I presume I should be able to get that for a few hundred on an hourly basis rather than the thousands for the sign off .
I think of myself as reasonable financially aware but pensions can be very complex instruments, I can see why IFAs want so much to sign off something that could easily come back and bite them.
Thanks again for your thoughts

xylophone

You have obtained a new state pension statement?

https://www.gov.uk/check-state-pension

Do you have a "statement of deferred benefits on leaving" from the pre 90 pension?

What does it say re pre 88 GMP/post 88 GMP/excess?

Re GMP revaluation


https://www.barnett-waddingham.co.uk/comment-insight/blog/2012/07/24/revaluation-for-early-leavers/

https://www.barnett-waddingham.co.uk/comment-insight/blog/2014/08/18/what-is-a-gmp/

Do you have your scheme booklet? What does it say about deferred benefits?

Your scheme uses Fixed Rate? (This is very likely if a private scheme.)

Once in payment, your scheme has no obligation to index link any pre 88 GMP after GMP age or post 88 GMP above 3%.

nobody999

Hi Xylophone
Yes I obtained a new state pension statement, as far as I can see it doesn't refer to the GMP.
I obtained a 2deferred statement as at date of leaving and it shows the total annual deffered pension and the separate GMP element which is included in the total figure. My transfer value statement breaks down the GMP (at time of leaving into pree 88 £103 and post 88 £76 .
The links look very useful, I need to have a detailed read of those and maybe then I won't have so many questions.
I have read the pension booklet and it says lots about deferred benefit, doen't say much about GMP and I need to review it again to clarify exactly where the deferred benefit icreases apply, I suspect it only applies to the none GMP element.
It isn't a fixed rate, it is the higher of 5% or RPI although of course for quite a few years RPI has been below 5%, my current pension has a similar term but the inflation measures and backstop figure are not quite as generous.
Thanks again

xylophone

Re your new state pension statement,

what exactly does it say?


https://www.gov.uk/government/publications/state-pension-fact-sheets/contracting-out-and-why-we-may-have-included-a-contracted-out-pension-equivalent-cope-amount-when-you-used-the-online-service

http://webarchive.nationalarchives.gov.uk/20140723121148/https:/www.gov.uk/government/uploads/system/uploads/attachment_data/file/210299/single-tier-valuation-contracting-out.pdf



Substitute £155.65 for NSP in the above and £119.30 for BSP.

https://www.royallondon.com/Global/documents/GoodWithYourMoney/TOPPING-UP-YOUR-STATE-PENSION-GUIDE.pdf

xylophone

Regarding your deferred pension, GMP revalues differently from the excess.

Your scheme administrators should be able to tell you whether your scheme uses Fixed Rate or Full rate for GMP revaluation and scheme specific or statutory revaluation for the excess.

They should also be able to tell you how the pension escalates in payment
before/after GMP age. Ask for a full explanation in writing if your scheme booklet does not clarify.