Deferred Pension – Guaranteed Minimum Pension

Hymie

I have a deferred pension from my previous employer, which can be taken from age 50 (with applicable reduction) provided the pension amount meets the pension payment Guaranteed Minimum Pension.

I understand that the reason for this requirement is that my pension was contracted out of the state scheme and therefore the payment from the scheme must equal at least the value I would have received from the Second State pension, had I paid in to that scheme.

When I left my employment, I was earning £20K/year, having paid in to the pension for 15 years.

I have been advised that I cannot take my deferred company pension at age 50 because my Guaranteed Minimum Pension over this period is around £5K/year, which is more than my pension would pay me.
This figure of £5K/year for 15 years of pensionable Second State pension service seems high – given that for 40 years, this would equate to over £13K/year. On top of this, I would receive my Basic State pension, netting me a pension of around £18K/year based on a £20K salary.

Can anyone advise me of what they would expect the Guaranteed Minimum Pension would be for 15 years service, based on a £20K salary – would you expect it to be around £5K/year?

Curious_Moose

You don't say when you started your pension scheme service, but GMPs ceased to accrue after 6 April 1997. You would only accrue a GMP if you were Contracted Out between 6 April 1978 and 5 April 1997. In addition, the GMP replaced the pension you would have received from the State Earnings Related Pension Scheme (SERPS) not the Second State Pension.

So the GMP you accrued, would depend on your (Middle Band) earnings you paid while you were a member of the scheme up to April 1997. What period does the 15 years service you refer to actually span?

In addition, depending on when you left, it would get revalued at a fixed rate for each complete tax year up to age 60 (female) or 65 (male). So if you left a few years ago, it could have grown quite significantly.

Sorry, I can't give you an actual figure. I do have access to a GMP calculation program, but it's at work!

Hymie

Many thanks for your reply Curious Moose.

In answer to your specific questions, my pension contributions covered the years 1985 to 2000, with me reaching 50 this year.

From what you say, it would appear that anyone who has a contracted out company pension would be very unlikely to be able to take a deferred pension early. This is because the state pension it must match, is increased by an inflation figure (until your retirement date) and the deferred pension is significantly reduced for taking it early.

Despite the fact that my deferred pension is inflation linked – this is not taken into account when comparing the deferred pension with the SERPS pension.

I’m sure I am not the only person who has fallen foul of these rules, and others may be interested in this post.

I would be grateful for your (Curious Moose) thoughts on the above.

Curious_Moose

Ok, I've done some ballpark GMP calculations based on a few assumptions:

1) Male
2) Date of birth 01/10/1958 (It's the tax year of DOB which matters, not the actual month/day)
3) Contracted out 01/06/1985-01/06/2000 (Again, it's the tax years that matter, so 01/06/2000 would give the same results as any date from 06/04/2000 to 05/04/2001). In any case, no GMP would be accrued after April 1997.
4) Starting with a salary of £20k in 2000, assuming previous salary increases (or rather decreases to go backwards) of 3% p.a. that gave an approximation of Middle Band Earnings (or contracted out contributions pre 1987) for when you accrued a GMP between 1985-1997.

That would give a GMP at date of leaving of £1215 p.a. Clearly, this is just a guesstimate as the correct figure would depend on the correct answers to points 1 to 4 above. This would increase each 6 April crossed by 6.25%, so would now (2008) be revalued to about £1973 p.a. If it was revalued to age 65, it would be £4610 p.a.

So when they say your GMP is around 5K p.a. I'm guessing they mean your GMP at 65.

To put it in perspective, if we re-do the GMP calculation using the same assumptions as above, but with the maximum Middle Band Earnings each year (which you were not earning), we would get a GMP at 01/06/2000 of £1520 which would revalue to £5771 by age 65.

Which makes it seem even more likely that the 5K p.a. GMP figure they refer to is actually the figure at age 65

So hopefully, this goes someway to answering the question in your first post about the actual amount of GMP you earned.

When you left the scheme, they should certainly have provided you with a statement that clearly stated what the pension was at date of leaving (GMP and non-GMP) and an estimate of how that would revalue to your normal retirement age.

The rules on early retirement would differ from scheme to scheme, but what you said makes sense. A pension payable from age 50 is a lot more expensive than one from 65 and so it needs to be reduced significantly so as not to be unfair on those who do wait until 65 to get their pension. Typically, the reduction could be anything between 4% and 8% for each year early. So someone with a pension of £10,000 from age 65 would only receive £8,000 p.a. if they took it from age 60, assuming a 4% reduction (simple interest) for each of the 5 years. Again, the early retirement factors (ERF) differ from scheme to scheme depending on how generous the Actuaries are feeling!

If you enquired, your scheme may tell you a few more details such as how the numbers at normal retirement compare to those at early retirement, and what ERF they have assumed.

Like I said, the above figures are general comments/guesstimates based on the information you provided. The administrators of your scheme should certainly be able to provide accurate answers, but in my experience, unless you ask a specific question they won't give you a proper answer, even if it's perfectly obvious what you're trying to get at. So if you want to take this further, you should get confirmation of:

1) Your deferred pension when you left. This should be split between GMP and non GMP elements.
2) How these different elements increase between leaving and retirement.
3) The estimated pension at normal retirement.
4) The early retirement pension from age 50 and how it has been worked out with reference to any early retirement factors applied.
5) If you can't take an early retirement pension from age 50 because of the GMP restrictions, at what age can you take early retirement such that the restriction no longer "bites".
6) Will you need the consent of the trustees and how likely is this?
7) You could also ask for a copy of the latest Actuarial valuation of the scheme, which gives an indication of how the liabilities of the scheme compare against the assets.

Hope this helps in a general type of way!

Hymie

Curious Moose – once again thank you for your prompt reply. Your calculations with regards my GMP at 65, would appear close to what I am being told by my deferred pension scheme.

To put some more flesh on the figures, my deferred pension will pay me just under £7K/year at age 65. This figure of £7K/year is index linked – each year I receive notification of the increase applied due to inflation over the previous year.
If I could take it from age 50 (now), it would be reduced to just under £4K/year (this would also be index linked).

Now you might say that I am better off waiting until 65 to take the pension. But if we ignore inflation (assume it to be zero), it is not until I reach 83 years of age, that in taking the pension at 65, does what I receive from the pension exceed the amount received having taken the pension at 50.
No one can see the future, but I think that there is a fair chance that I will not see age 83 and would therefore be better off (financially) taking the pension now.

What seems unfair to me is that my pension scheme is comparing the figure of £4K/year, which I would receive if I could take the pension now (which is index linked), with the GMP figure of around £5K/year (which has been index linked to age 65). If my £4K/year (now pension), was index linked to age 65 it would be greater than £5K/year – allowing the pension scheme to pay out now. In comparing these two figures (£4K/year & £5K/year), they are not comparing like with like.

Curious_Moose

Hymie, yes, sometimes the maths of how it all works out does seem unfair.

Still, look on the bright side. You've got a decent index-linked pension and they're like gold dust these days!

Hymie

Curious Moose – I was aware that the pension was a good investment in terms of potential returns, that is why I was disappointed that I cannot start taking a reduced pension at 50.

Your posts have cleared things up for me – hopefully others will find this thread useful, I have been searching the Net for information on this subject, but without success.

As a footnote, in all probability I will be able to take a reduced pension at 55 (in 2010 this becomes the minimum age for taking a pension). By then my £7K/year indexed pension will have increased by 5 years worth of inflation and the applicable reduction for taking the pension early will be reduced (due to me taking the pension at 55 rather than 50) – the GMP will remain at £5K/year.

Thank you for your time in responding to my questions.

Northside_Raymie

Hi Hymie and Moose,
Thanks for the nfo.
I was refused an early pension (Ill Health) from my Insurers (CIS) for the same reasons as Hymie was, that was about 4 yeasr ago, but with the info Moose has provided I'll try again, this time I'll ask the relevent questions.

Thanks agin guys

Retired_I.F.A.

"I have been advised that I cannot take my deferred company pension at age 50 because my Guaranteed Minimum Pension over this period is around £5K/year, which is more than my pension would pay me."

Actually you have not been advised you have been told that you cannot draw the company pension at 50 because of the GMP There is quite a difference
The scheme administrators / trustees cannot by law advise only state whats possible within their scheme. Had you asked how can i get at my pension at 50 the answer would have been totally different.

What you need to do is take the paperwork you have along to an IFA authorised to do pension transfer business. He will write and find out the transfer value of the pension and a lot more info on it which you may not already have. He can then conduct a TVA a transfer value analysis and compile a report wherin it will compare your options which include taking an immediate pension.if your 50 or older now.


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EdInvestor

Retired_I.F.A. wrote: »

What you need to do is take the paperwork you have along to an IFA authorised to do pension transfer business. He will write and find out the transfer value of the pension and a lot more info on it which you may not already have. He can then conduct a TVA a transfer value analysis and compile a report wherin it will compare your options which include taking an immediate pension.if your 50 or older now..

This is of course not the same thing as the OP wants at all, but a move which would involve considerably more risk.

Which is not to say it shouldn't be investigated, but it might be a waste of money..

Retired_I.F.A.

"This is of course not the same thing as the OP wants at all,

Try reading the opening post Ed.

but a move which would involve considerably more risk.

There is no risk involved in exploring the options and the decision to say transfer and take the benefits now is no more risky than the gamble of being around to collect them at NRD.

"Which is not to say it shouldn't be investigated, but it might be a waste of money."

An IFA can provide a TVA at no cost. They dont all charge £500 for one like you beloved H+L Ed.