Confused over GMP

Ceme3000

Hi All,

I am a bit confused by what I have been told by my pension administrator and would appreciate an opinion before I email them.

A little background first. I left an employer through redundancy when I was 23 (I am 53 this year) and was in their final salary pension scheme. A few months before I turned 50 in 2016, I had a 15 page letter from them out of the blue outlining my pension options for my normal retirement age on my 50th birthday. They asked for birth certificate, confirmation of options, nomination form etc. The annual pension amount was confirmed in the letter and it said that it would be paid monthly in arrears etc.

I had no idea a pension was payable from 50 so phoned them to ask if it was a mistake. They confirmed that the scheme rules allowed me to take the pension early, without penalty from 50 and implied that it was because I was made redundant. The amount offered from age 50 (£1450pa) was roughly the same as the usual annual pension benefit statement I had previously received stating a normal retirement at age 65, so I assume that without penalty is correct. I also asked them if I could take the pension at any time in the future if I didn't take it at 50 and they said yes.

I decided not to take the pension then but now at age 53 I am have retired early following redundancy last year and currently living on savings, so I thought it makes sense to take this small pension now as I would pay no tax, as my earnings are below the personal allowance.

I contacted the administrator a few weeks ago asking for a revised quote but have had a short letter back explaining that I can't have anything at the moment because it is not higher than the GMP.

I'm confused! Presumably it was above the GMP in 2016 or they wouldn't have written to me. I did call their helpdesk but the person was quite rude and said that the GMP wasn't calculated in 2016 and that it was 'the law' that they had to write to me. Can a pension be calculated without knowing the GMP? Surely not !

Does anyone know if a pension paid early without penalty can fall below the GMP (as it hasn't fallen)? I thought it would only not meet GMP where a reduced pension taken early doesn't increase sufficiently over the years to reach GMP by age 65.

I am going to email them to ask more questions to try and understand what's changed between 2016 and 2019, but want to be in a position to ask the right questions.

Any advice?

Thanks for your help

xylophone

You were a member of a contracted out salary related pension scheme - your pension was "deferred" when you left in around 1989.

When you left, were you given a "statement of deferred benefits" showing

pre 88 GMP
post 88 GMP
excess?

GMP age for a male is still age 65 (as it is 60 for a female) even though SPA age has increased.

Do you have a copy of the Scheme Rules?

See https://forums.moneysavingexpert.com/discussion/1439747/guaranteed-minimum-pension-early-retirement

https://forums.moneysavingexpert.com/discussion/5677147/how-will-gmp-affect-me-getting-deferred-civil-service-classic-pension-at-55

Have you obtained a state pension forecast?

Silvertabby

The letter in 2016 was sent in error - whoever did the quote forgot to carry out the essential GMP check.

The book of GMP is longer than War and Peace but, very briefly, when you joined your contracted out pension scheme you and your employer paid reduced rates of NI. In return, your pension scheme had to promise that your pension would be at least the additional State pension you had given up by contracting out (your GMP).

As xylophone says, when you left your pension was based on:

Pre 88 GMP
Post 88 GMP
Excess

= total deferred pension as at your date of leaving.

Since then, your total deferred pension has increased in line with the scheme rules - 0%, RPI, CPI, capped/uncapped etc. However, underneath the surface your total GMP has increased at a usually higher rate.

30 years later, with only a small pension, it's really not unusual for your GMP to have exceeded the old total pension plus increases (if any).

Now we come to the GMP promise. In return for paying less NI, your employer promised to pay you your GMP amount from at least your GMP age (still 60 for a woman, 65 for a man). It sounds very much like your total deferred pension to date is lower than the GMP your pension scheme has to pay you, so I'm afraid that they are within their rights to further defer payment until you reach your GMP age.

Ceme3000

Thanks to your both for the replies, that does make sense. Unfortunately I have no GMP figures or booklets relating to the scheme, if I ever had them they have long since been lost in the last 30 years. I too suspect that I was given incorrect information in 2016. All I can do really is ask them to confirm this and to explain in more detail the GMP calculations so that I can better understand it.

I have a state pension forecast and know I will be a few years short to get the full state pension and plan to top this up nearer to my state pension retirement age.

Ceme3000

Silvertabby wrote: »

The letter in 2016 was sent in error - whoever did the quote forgot to carry out the essential GMP check.

Well you were half right.

I have been back to the provider to ask for an explanation and eventually received a gushing apology to say that the 2019 letter was wrong and that I can have the pension at age 50, without penalty because of compulsory redundancy when I was aged 23. Apparently the letter was automated and should not have been sent. I have now received a new pension option letter which interestingly has a starting pension 34% higher than the previous quote in 2016.

I am not earning so if i took the pension now it would be tax free until i get to 60 in 7 years time, but after putting the figures into a spreadsheet it would seem that even allowing for no tax deduction and the annual increases on the pension i am still better off in the long run by deferring it for longer, assuming i dont die prematurely.

For now I will leave it, get another quote in 2 years time at age 55 to see what the position is then.

Silvertabby

Ceme3000 wrote: »

Well you were half right.

I have been back to the provider to ask for an explanation and eventually received a gushing apology to say that the 2019 letter was wrong and that I can have the pension at age 50, without penalty because of compulsory redundancy when I was aged 23. Apparently the letter was automated and should not have been sent. I have now received a new pension option letter which interestingly has a starting pension 34% higher than the previous quote in 2016.

I am not earning so if i took the pension now it would be tax free until i get to 60 in 7 years time, but after putting the figures into a spreadsheet it would seem that even allowing for no tax deduction and the annual increases on the pension i am still better off in the long run by deferring it for longer, assuming i dont die prematurely.

For now I will leave it, get another quote in 2 years time at age 55 to see what the position is then.

Thanks for the update. That's very unusual for a pension scheme to pay on redundancy terms once minimum age has been reached. That certainly doesn't happen in the so-called gold plated public sector - be made redundant at 54 and your pension is treated as though you voluntarily retired!

xylophone

I can have the pension at age 50, without penalty because of compulsory redundancy when I was aged 23.

It could be to do with redundancy (difficult to be sure without seeing a copy of the scheme rules/ the redundancy package) but it is possible that your scheme had a protected retirement age of 50 and permitted benefits to be taken without actuarial reduction (see links in previous) at that age.

The GMP requirement is that from GMP age, your pension in payment must be at least as great as your deferred GMP revalued to GMP age.

It seems that your administrator has checked that this will be the case - at all events, another check will be done at GMP age .

From GMP age, the scheme will have no obligation to pay any increases on the portion of your pension relating to pre 88 GMP, will only have to pay increases on the post 88 up to 3% CPI (or just possibly RPI) while the excess will increase under scheme rules.

As it seems that Scheme Pension Age is 50 , have you asked the administrator how your pension is revaluing in continued deferment?

I am not earning so if i took the pension now it would be tax free until i get to 60 in 7 years time,

Can you explain this? Are you expecting to receive another pension at this time which together with other income will be higher than your personal allowance?

xylophone

for a pension scheme to pay on redundancy terms once minimum age has been reached

I have a vague memory of a mass redundancy in a scheme back in the late seventies which permitted an immediate and enhanced pension to be paid to those ( I think) over age 40 or possibly 44.

The Scheme otherwise permitted pension to be drawn from age 50.

Ceme3000

Thanks for the replies. Yes the option to take at aged 50 following redundancy 27 years previously does seem very generous.

xylophone wrote: »

have you asked the administrator how your pension is revaluing in continued deferment?

Good point. I assume you mean the starting pension calculation? Actually no. I have made an assumption that if it has increased 34% in 3 years then it will continue to increase at about 10% a year. Is that not likely to be the case? Or did you mean the GMP revaluation method?

xylophone wrote: »

Can you explain this? Are you expecting to receive another pension at this time which together with other income will be higher than your personal allowance?

Yes I have another DB pension I can claim at 60. This will pay just over my PA, approx 13.5K with a 25% TFLS (I can take this DB pension with no reduction for TFLS as there is a separate employer DC pot linked to the DB scheme). I also have a SIPP with HL (currently 82K). So I'm thinking use the SIPP first keeping withdrawals within the personal allowance for 5/6 years from age 55, then claim both DB pensions. I need about 15k to live on which the two DB pensions will cover.

xylophone

Good point. I assume you mean the starting pension calculation?

There are rules around increases in deferment but some schemes are more generous than others and go beyond any statutory requirement.

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

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

Is your administrator able to provide you with a copy of the Scheme Rules/ booklet?

Ceme3000

Thanks for the links. I'll see if I can get hold of the rules.