Retiring - "Final Salary" PENSION ALERT

yabbadoo

I retired early, aged 57, after 30+ years service, on a "final salary" Company pension, index-linked to inflation with a "cap" of 5%. No problem, till I became 65 - I received annual "inflation" increases in full, each November. (31 years equated to 51% of final salary - 40 years would have been 66%).

At age 65, I find that the Company pension has two elements - a "Guaranteed Minimum Pension" of approx £5000 (a figure which increases annually, presumably with inflation) and the remainder. (This GMP appears to be a Government-inspired figure, and at some stage has been incorporated by law into the Pension scheme).

This GMP element has an inflation "cap" of only 3% (presumably also Government-regulated).

Example - assume a pension of £15000, inflation 4.1% (the actual index figure notified in March).
Of the £15000, the first £5000 (GMP) increases by only 3%. the balance at 4.1% - and of course these increases are GROSS, before tax.

No matter what the ultimate pension is, it is IMPOSSIBLE to acheive the "headline" 5% index-linking. Yet again, the less-well-off are hardest hit (those who retired on £5000 pension would be limited to the 3% cap, when inflation exceeds 3%).

5% capped index linked pension? I don't think so!
WHY does the Government have to restrict the GMP inflation rate - which is paid for by private (not State) contributions?

dunstonh

WHY does the Government have to restrict the GMP inflation rate - which is paid for by private (not State) contributions?

GMP is linked to SERPS/S2P and is not paid for by your personal or company contibutions. It is based on NI contributions.

It may be fashionable to bleat about the "less well off being hit" at the moment but using your example £15,000 pension plus basic state pension of £4700 a year on top means an annual income just short of £20,000 a year. That is not "less well off" territory. Also noting that the tax free lump sum probably came to around £45,000 as well.

Many final salary schemes cost nothing or have very small contribution rates so the actual benefits compared to the costs are very favourable. So, having had a possible 40 years of that low cost benefit, no doubt you were able to put more aside as personal provision?

Dean101

Your pension scheme was contracted out of SERPS (now S2P), the 2nd tier state pension (i.e. the earnings related one). As a result of this you and your employer paid slightly less NI contributions to the government with the amount saved instead going into your private scheme. In return your scheme had to provide a minimum proxy known as GMP. GMPs only kick in from State Pension Age.

A private scheme does not give any increases on GMP accrued between 4/1978 and 4/1988
A private scheme only has to give increases of RPI up to 3% on GMP accrued between 4/1988 and 4/1997
GMP effectively ceased to exist from 4/1997

However, the State will make up the difference to FULL RPI increases (no cap) on all GMP at SPA and beyond.

This difference will come through as extra on your government pension.

If you look at your next government pension statement, you should BSP, SERPS/S2P for periods when you weren't contracted out and additional pension representing the excess increase (e.g for the year you mention, 4.1% minus 3%).

You're not being shortchanged - in fact you'll benefit on that £5000 if inflation ever goes over 5% in a tax year. The annual increase on the GMP element is just being broken up now and paid from 2 sources instead of 1 as before.

Hope this helps.

yabbadoo

My points were two-fold
1/ A so-called 5% pension cannot in any circumstances deliver 5%
2/ A person retiring on such a scheme with only a £5000 pension is hardest hit with the arbitrary 3% cap, though the pension to which he/she contributes is allegedly inflation-proofed up to 5%.

You may have other ideas, but I don't consider £5K plus State £4.7K (total £9.7K) to be excessive income, and the restriction hits them harder in both hard cash and percentage terms (exact same scenario as Budget abolishing 10% tax rate affects under 65's on less than £17K).

It's the Government=sourced arbitrary 3% cap that does the damage to these lower-rate pensioners, who actually PAID for their future retirement via both company and NI contributions.

Yabbadoo





(quote} GMP is linked to SERPS/S2P and is not paid for by your personal or company contibutions. It is based on NI contributions.

It may be fashionable to bleat about the "less well off being hit" at the moment but using your example £15,000 pension plus basic state pension of £4700 a year on top means an annual income just short of £20,000 a year. That is not "less well off" territory. Also noting that the tax free lump sum probably came to around £45,000 as well.

Many final salary schemes cost nothing or have very small contribution rates so the actual benefits compared to the costs are very favourable. So, having had a possible 40 years of that low cost benefit, no doubt you were able to put more aside as personal provision?[/quote]