GMP Guaranteed Minimum Pension Element off Final Salary Pension

Lewiboy

I have recently asked for early retirement estimate for my final salary pension @ 56 . 

Included in the £24k/ year valuation is a £3.2k figure for GMP stating this is the minimum employer pension I should get at 65.

What does this figure mean in real terms i.e. is it deducted or additional to the employer + state pension ?

Thanks in advance.

hyubh

Lewiboy said:

I have recently asked for early retirement estimate for my final salary pension @ 56 . 

Included in the £24k/ year valuation is a £3.2k figure for GMP stating this is the minimum employer pension I should get at 65.

Originally (back when GMPs first became a thing) it meant that, however for you in practice it will denote one or two 'tranches' of your total scheme pension that are subject to their own 'revaluation' and 'increase' rates. So unless the scheme pays more than what it has to, any pre-88 GMP component will not increase once it comes into payment, while any post-88 GMP component will increase by CPI up to 3%. However, between leaving and your GMP payment age (= 65 for men, 60 for women), both sorts of GMP will 'revalue' according to the scheme's chosen GMP revaluation method. Most (though not all) private sector schemes use so-called 'fixed rate', which if you left active membership many years ago, can inflate the GMP quite a bit.

What does this figure mean in real terms i.e. is it deducted or additional to the employer + state pension ?

Had you reached state pension age under the old (pre-2016) state pension system, the GMP would have effectively been part of your 'contracted-out deduction', reducing your additional (not basic) state pension. However as you reach SPA after 2016, a calculation was made on changeover to determine your opening transitional position. From that point, if you've been in work, you have been accruing new state pension on the same basis as someone who was never 'contracted out' of SERPS (or S2P after 1997). In all likelihood this will leave you at least as well off as before, and if you had been contracted out for a long period of time pre-2016, actually with a materially greater state pension than if the old state pension system had continued, since you will now be accruing what would have been additional state pension negated by the contracted-out deduction previously.

molerat

As an example one of my pensions that I started taking at 55 initially increased the full amount by RPI each year.  When I reached SPA the pension was split into 2 parts.  The GMP portion now increases with CPI limited to 3% and the remainder with RPI and unlimited.

Lewiboy

“ In all likelihood this will leave you at least as well off as before”. 

Thanks for your help,

I guess I will also know when I reach 65 what the delta will be (if any)

Terron

One of my pensions has increases once in payment "entirely at the discretion of the trustees" which for 15 of the last 17 years has meant nothing and 1% in the other two.

But it does include a GMP element  currently increasing at 7% a year and which will increase at CPI capped to 3% after I reach 65. It is quite possible It is quite possible that it will become the larger part of that pension.

mark55man

A colleague at work had a GMP worth 3Kp.a - however there was an element called excess (which I think is in excess of what was needed to make up the additional pension referenced above).  It turned out because it was incremented at 7% pa for 25 years that the excess was some £9K pa.  Completely unexpected to him.  Additionally, there was some timing related clause that said he was allowed to take it at 60 unreduced as he had been an active pensioner at a certain date.  If I was you I would write to the pension company asking what your options are for taken the pension at age 60 and 65, and specifically check what the reduction (if any) is between the two.

(In my case if I took my pension early it would be actuarially reduced by 6% p.a.  But if it is reduced by 0 or a low amount then you should just take it, as that would give you money early, but without costing you in the long run (at 6% reduction I would only have to live about 16 years past 65 before I would be down on the deal) - although there are lifestyle and tax reasons that make that logic complicated   

Lewiboy

Thanks everyone.

I’ve checked the gov pension website which says I’ve accrued £160/ week state pension to date (now 55) payable at 67. From the posts the £3.2k @ 65 appears additional to the basic state and final salary pension £24k @56 or £30k @60. The pension I’m referring to is an old final salary pension (worked 1982 to 2010), which I remember something about being contracted out.

I’m still confused if the GMP elements is in addition to (or part of) the state and final salary pension. 

Thanks for the advice re taking the GMP at 60/65 to see if their is an actuarial reduction.

Hope the above makes sense.

xylophone

I’m still confused if the GMP elements is in addition to (or part of) the state and final salary pension. 

The GMP is part of your occupational pension, not an addition to it and there is no longer a link between it and the state pension.

1978 saw the introduction of SERPS. Employers/employees paid additional NI contributions to build up a pension in addition to the basic state pension.

However, in return for guaranteeing an occupational pension that was at  the very minimum as great as would be provided by SERPS, employers could contract out of the SERPS scheme and pay lower NI contributions (as did the employees).

In fact, the occupational pension was usually far  higher than this bare minimum.

As a sweetener to employers, the state guaranteed that when the  members of the  occupational scheme reached GMP age (60 F/65M) which used to align with State Pension Age  but no longer does, it would pay inflation linked increases on that part of the occupational pension that represented the GMP.

These increases would be paid with the state pension.

In 1988, the government wished to save money on the inflation linking guarantee and therefore the requirement became that the Occupational Scheme would have to inflation link that part of the occupational pension representing post 88 GMP up to 3%- if inflation was over 3%, the government would pay the balance.

This system ended in 1997 but the linking to the State Pension as above remained in place, only ending with the advent of the new state pension in 2016.


Nevertheless, for those whose private (non Public Sector) occupational pensions include a GMP, the system still has an effect.

They will find  that at age 60/65 as appropriate, the Scheme Administrator will write them a letter on the following lines

Dear Mr/Ms XXX

Anyco Pension Fund

We refer to your pension paid by Anyco Pension Fund.

We have  received confirmation from HMRC of the amount of GMP that is payable from your 60/ 65th birthday.

The GMP elements of your pension increase in payment at different rates to your main  Scheme Pension. We therefore detail below the revised split of your pension and the future increases that you will receive from the  Scheme.

Pre 1988 GMP  £ xxx per annum. No Increase from the  Scheme. 

Post 1988 GMP  £yyy per annum Increase in line with CPI up to a maximum of 3% each year. 

 Pension in excess of GMP, £zzz per annum In line with (Scheme Rules) 


You are going to take your occupational pension earlier than your scheme's Normal Retirement Age.

It could be that your scheme will index link the whole of your pension under whatever index is set by scheme rules until your reach GMP age when the split detailed above will be done.

However, this may not be the case- you should check with the administrator.

xylophone

I’ve checked the gov pension website which says I’ve accrued £160/ week state pension to date (now 55) payable at 67. 

On 6/4/16, two calculations were done to  establish your "starting amount" for new state pension.

NI years/30 (maximum) x £119.35 (full basic SP) + (State Additional Pension - Deduction for Contracting Out).

NI years/35 (max) x £155.65 (full NSP) - Contracted Out Pension Equivalent.

Your "starting amount" was the higher of the two.

It is clear that your SA had not reached an amount equal to the new state pension - therefore NI contributions since then have been increasing your entitlement to NSP.

However, you have still not reached a full NSP and if you are now ceasing to be employed/ earn enough to be paid or credited with NI, you will need to look into paying voluntary NI if you wish to reach a full NSP.

What does your State Pension Forecast have to say on this point?

https://www.which.co.uk/money/pensions-and-retirement/state-pension/your-state-pension-forecast-explained-a24r12y9jt41

hyubh

mark55man said:

there was an element called excess (which I think is in excess of what was needed to make up the additional pension referenced above). 

Excess = scheme pension - GMP. So a scheme member earns a scheme pension however that is determined (say, 1/60 x final salary x number of years membership), with a separate calculation determining the GMP (which, as SERPS, has a somewhat complicated CARE-style calculation). The scheme pension on leaving is then divided into GMP and excess pension for revaluation (and ultimately increase) purposes.

Lewiboy

Thanks everyone for your knowledge and patience. The GMP situation is now much clearer.