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  • FIRST POST
    • hogweed
    • By hogweed 13th Oct 19, 4:37 PM
    • 97Posts
    • 16Thanks
    hogweed
    GMP confusion
    • #1
    • 13th Oct 19, 4:37 PM
    GMP confusion 13th Oct 19 at 4:37 PM
    Well, that day which was always impossibly far in the future is now only weeks away Ė ie my 65th birthday. Iíve received some literature from AEGON concerning my pension, and Iíd appreciate some kindly advice


    It concerns what I think is called a Section 32 Buyout? I left employment with British Telecom in 1988, after nearly 8 yearsí service. My BT pension was frozen (donít know if thatís the correct term, but I expect youíll know what I mean).


    A few years later, I was approached by a local IFA (friend of a friend), who assured me my money was wasted there, and that Iíd have vastly more to retire on if I transferred it to a scheme with Scottish Equitable. Years later, when I got better educated, I came to doubt the wisdom of this advice, and ended up with the Financial Ombudsman, who said I didnít have a case for complaint. Just telling you that up front in case I get a flood of comments asking why I did it etc!


    Anyway, we are where we are now. The pension fund, instead of paving my driveway with gold, spectacularly failed to accumulate anywhere enough to even provide a pension like the one it replaced. However, they had to provide a guaranteed minimum (GMP) which, I understand, is roughly equivalent to the original BT one. This is where the confusion beginsÖ


    The GMP is as follows:


    Benefits Annual
    Accrued Pension Escalation

    Pre 6/4/88 £5058 Level
    Post 6/4/88 £656 RIP cap 3%


    Would anyone care to explain to me why itís in 2 portions, and why the greater part doesn't increase annually? Iím probably being very dim here, but I am when it comes to figures Iím afraid



    Thanks
Page 1
    • ffacoffipawb
    • By ffacoffipawb 13th Oct 19, 4:45 PM
    • 2,987 Posts
    • 2,130 Thanks
    ffacoffipawb
    • #2
    • 13th Oct 19, 4:45 PM
    • #2
    • 13th Oct 19, 4:45 PM
    Well, that day which was always impossibly far in the future is now only weeks away Ė ie my 65th birthday. Iíve received some literature from AEGON concerning my pension, and Iíd appreciate some kindly advice


    It concerns what I think is called a Section 32 Buyout? I left employment with British Telecom in 1988, after nearly 8 yearsí service. My BT pension was frozen (donít know if thatís the correct term, but I expect youíll know what I mean).


    A few years later, I was approached by a local IFA (friend of a friend), who assured me my money was wasted there, and that Iíd have vastly more to retire on if I transferred it to a scheme with Scottish Equitable. Years later, when I got better educated, I came to doubt the wisdom of this advice, and ended up with the Financial Ombudsman, who said I didnít have a case for complaint. Just telling you that up front in case I get a flood of comments asking why I did it etc!


    Anyway, we are where we are now. The pension fund, instead of paving my driveway with gold, spectacularly failed to accumulate anywhere enough to even provide a pension like the one it replaced. However, they had to provide a guaranteed minimum (GMP) which, I understand, is roughly equivalent to the original BT one. This is where the confusion beginsÖ


    The GMP is as follows:


    Benefits Annual
    Accrued Pension Escalation

    Pre 6/4/88 £5058 Level
    Post 6/4/88 £656 RIP cap 3%


    Would anyone care to explain to me why itís in 2 portions, and why the greater part doesn't increase annually? Iím probably being very dim here, but I am when it comes to figures Iím afraid



    Thanks
    Originally posted by hogweed
    Pre April 1988 GMP does not increase in payment. Post April 1988 increases in payment at 3%.

    As you left in 1988 the post 1988 GMP is going to be at most 8 months worth so will be about 1/12 of the total GMP which looks about right.
    Retired: Financial Independence achieved in June 2019.

    Cofiwch Dryweryn
    • hogweed
    • By hogweed 13th Oct 19, 4:48 PM
    • 97 Posts
    • 16 Thanks
    hogweed
    • #3
    • 13th Oct 19, 4:48 PM
    • #3
    • 13th Oct 19, 4:48 PM
    Pre April 1988 GMP does not increase in payment. Post April 1988 increases in payment at 3%.

    As you left in 1988 the post 1988 GMP is going to be at most 8 months worth so will be about 1/12 of the total GMP which looks about right.
    Originally posted by ffacoffipawb

    Thanks, much appreciated. I assume this is a government thing, rather than an AEGON decision... don't suppose you know the rationale behind something which seems a little unfair, as I believe the original BT pension which was transferred was all index linked?
    • xylophone
    • By xylophone 13th Oct 19, 5:16 PM
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    xylophone
    • #4
    • 13th Oct 19, 5:16 PM
    • #4
    • 13th Oct 19, 5:16 PM
    When you were employed by BT, the pension scheme was "contracted out" of the additional state pension scheme.

    Pre 1997, this meant that the scheme had to guarantee to provide a pension at least as great as the ASP foregone. This was the GMP.

    It was not however the whole of the pension (although in the case of early leavers it might have represented a very large part of it).

    Originally the govt. agreed to index link the whole of the GMP once it came into payment (age 60 F/65M) through the mechanism of the ( old )state pension - this changed post 88 so that the scheme had not to index link pre 88 GMP but 88 - 97 GMP up to 3%. The "excess" was index linked under scheme rules.

    When you transferred your pension into a S32, the policy provider had to continue to protect that GMP - see

    https://www.financialadvice.net/s32_buy_out_plan/zone/1288
    Last edited by xylophone; 14-10-2019 at 8:11 PM. Reason: missing not added
    • hogweed
    • By hogweed 13th Oct 19, 6:12 PM
    • 97 Posts
    • 16 Thanks
    hogweed
    • #5
    • 13th Oct 19, 6:12 PM
    • #5
    • 13th Oct 19, 6:12 PM

    Thanks I've read it a couple of times, but the part of the brain needed to understand it seems to be an optional extra that wasn't fitted to me


    Never mind, nothing I can do about it anyway... I was just trying to cross the i's and dot the t's...
    • DairyQueen
    • By DairyQueen 13th Oct 19, 7:03 PM
    • 1,017 Posts
    • 1,818 Thanks
    DairyQueen
    • #6
    • 13th Oct 19, 7:03 PM
    • #6
    • 13th Oct 19, 7:03 PM
    Very simply...
    The GMP is the minimum annual pension that Aegon must provide to replace what you would have received (according to government calculations) if you had not contracted out of the state second pension during that period of employment.

    Prior to the introduction of the new state pension (and the end of contracting out) the government provided the bulk of the indexation on these 'GMP' pensions. The additional indexation amount was previously paid as an addition to the state pension.

    However, the great GMP stitch-up took place when contracting out ceased. The government broke its undertaking to provide the shortfall on indexation on GMP pensions. The net result is that schemes like Aegon must index-link post-88 GMP only up to 3% (under government rules) but have no obligation to index link pre 1988 GMP at all.

    The net result is that, once in payment, pre 1988 GMP pensions are no longer index linked. Aegon have not welched on the deal, the government has.

    Unsurprisingly, the government made no attempt to publicise this in the lead-up to the pension reforms. It's an outrage.

    If it helps...

    If you had stayed with BT then they would also have no obligation to make up the shortfall in indexation.

    My OH also has an S32 buy-out, all accrued pre-1988. The good news is that, whilst not in payment, it has increased at an annual rate way beyond inflation. This is because of the government mandated revaluation rates that applied to schemes back then. However, the bad news is that, like you, his pension will never increase by a single penny once in payment.

    The government's withdrawal of indexation on GMP was one reason why I was approved for a transfer out of my final salary scheme.

    I believe that indexation on GMP for those who retired under the old rules has also ceased. Most people would not have understood that, from 2016, they will be receiving less state pension than they would have otherwise received. The impact will compound over the remainder of their lives.
    Last edited by DairyQueen; 13-10-2019 at 8:19 PM.
    • xylophone
    • By xylophone 13th Oct 19, 7:36 PM
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    xylophone
    • #7
    • 13th Oct 19, 7:36 PM
    • #7
    • 13th Oct 19, 7:36 PM
    I believe that indexation on GMP for those who retired under the old rules has also ceased. Most people would not have understood that, from 2016, they will be receiving less state pension than they would have otherwise received.
    No, if you are receiving your State pension under the old rules, the old indexation system still applies.

    See post 12 here

    https://forums.moneysavingexpert.com/showthread.php?t=4532605

    However, even under the old rules, some occupational pensioners have been done down.

    The Government changed the indexation on Additional State Pension to CPI rather than RPI - RPI is nearly always higher.
    • DairyQueen
    • By DairyQueen 13th Oct 19, 8:14 PM
    • 1,017 Posts
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    DairyQueen
    • #8
    • 13th Oct 19, 8:14 PM
    • #8
    • 13th Oct 19, 8:14 PM
    No, if you are receiving your State pension under the old rules, the old indexation system still applies.

    See post 12 here

    https://forums.moneysavingexpert.com/showthread.php?t=4532605

    However, even under the old rules, some occupational pensioners have been done down.

    The Government changed the indexation on Additional State Pension to CPI rather than RPI - RPI is nearly always higher.
    Originally posted by xylophone
    Thanks for correcting me. I suspect that what you don't know about GMP can be written on the back of a postage stamp.

    So, those who retired under the old rules still receive full GMP indexation but those who retire under the new SP are out of luck?
    • xylophone
    • By xylophone 13th Oct 19, 8:39 PM
    • 31,674 Posts
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    xylophone
    • #9
    • 13th Oct 19, 8:39 PM
    • #9
    • 13th Oct 19, 8:39 PM
    So, those who retired under the old rules still receive full GMP indexation but those who retire under the new SP are out of luck?
    Well, from the previous link, you will see how indexing works on the old state pension (but you will also note the situation of those who ended up with a COD greater than their ASP).

    With regard to the new state pension, I think we've already been in discussion about how the "starting amount" was calculated.

    If you come under the NSP, then all of your pension up to a full NSP is index linked (currently) under the triple lock - any amount over is a "protected payment" and is index linked under CPI.

    Clearly, there is some ASP within the NSP and to the extent that this is the case, under the triple lock the pensioner is getting at least CPI or better.

    The same comment as above applies as regards CPI/RPI though!

    Those worst affected by the change to the NSP were those occupational pensioners with a GMP who were very close to SPA at the time of the changeover.

    They may well have had high COD/COPE which meant that they received much less than a full NSP with no chance to improve their starting amounts.

    They would then miss out on indexation of pre 88 GMP altogether and would receive only up to 3% on post 88 GMP through their occupational schemes.

    See https://www.nao.org.uk/wp-content/uploads/2016/03/The-impact-of-state-pension-reforms-on-people-with-Guaranteed-Minimum-Pension.pdf

    Those in receipt of Public Service Scheme pensions have been protected from this (at least up to those retiring in 2021).

    See https://researchbriefings.parliament.uk/ResearchBriefing/Summary/SN04956
    • hogweed
    • By hogweed 13th Oct 19, 11:07 PM
    • 97 Posts
    • 16 Thanks
    hogweed
    Thanks people Ė thatís very useful. I knew I was being stitched Ė just no necessarily by whom.


    Worse than that Ė Iíve just been told by HMRC or whatever they call themselves that, despite my having 45 yearsí paid up NI contributions, I have to give them another something like £1500 to get the full state pension.


    The only consolation is that itís a long time since anybody even bothered to try and maintain the illusion of fairness in our society, so I donít expect it
    • IanSt
    • By IanSt 14th Oct 19, 10:25 AM
    • 363 Posts
    • 273 Thanks
    IanSt
    Worse than that Ė Iíve just been told by HMRC or whatever they call themselves that, despite my having 45 yearsí paid up NI contributions, I have to give them another something like £1500 to get the full state pension.
    Originally posted by hogweed
    I assume many of those 45 years were when you were in a contracted out pension scheme, so you were paying less in national insurance contributions than someone on the same pay who was not.

    The only consolation is that itís a long time since anybody even bothered to try and maintain the illusion of fairness in our society, so I donít expect it
    I take it that you would not count it as fair if someone paying a smaller amount of national insurance got the same benefits as someone paying the full amount.
    • hogweed
    • By hogweed 14th Oct 19, 10:47 AM
    • 97 Posts
    • 16 Thanks
    hogweed
    I assume many of those 45 years were when you were in a contracted out pension scheme, so you were paying less in national insurance contributions than someone on the same pay who was not.

    I take it that you would not count it as fair if someone paying a smaller amount of national insurance got the same benefits as someone paying the full amount.
    Originally posted by IanSt
    Well, as I understand it, everybody gets the same basic state pension as long as their employer pays their NI contributions Ė so somebody earning £15k a year for life gets the same as somebody who earns £50k.


    Are you telling me Iím wrong about this??
    • LHW99
    • By LHW99 14th Oct 19, 11:04 AM
    • 2,268 Posts
    • 2,140 Thanks
    LHW99
    Thanks people Ė thatís very useful. I knew I was being stitched Ė just no necessarily by whom.


    Worse than that Ė Iíve just been told by HMRC or whatever they call themselves that, despite my having 45 yearsí paid up NI contributions, I have to give them another something like £1500 to get the full state pension.


    The only consolation is that itís a long time since anybody even bothered to try and maintain the illusion of fairness in our society, so I donít expect it
    Originally posted by hogweed
    The thing is, by being contracted out you:
    a) paid less NI (than someone contracted in)
    b) got a pension from the employer you worked for - the GMP was supposed to cover the difference between the old SP's likely to be earned by each type
    c) have a chance to buy added post 2016 years that would give you extra SP that will be index linked for life.
    • IanSt
    • By IanSt 14th Oct 19, 11:33 AM
    • 363 Posts
    • 273 Thanks
    IanSt
    Well, as I understand it, everybody gets the same basic state pension as long as their employer pays their NI contributions – so somebody earning £15k a year for life gets the same as somebody who earns £50k.


    Are you telling me I’m wrong about this??
    Originally posted by hogweed
    You are indeed - but you won't be the first (or the last)

    Someone who has been in a contracted out pension scheme has paid less towards the state pension than someone on the same pay who was not in a contracted pension scheme.

    The following comes from the government web page 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#the-contracted-out-pension-equivalent-cope
    So, although you may not have realised this, when you were contracted out, depending on the type of pension scheme(s) you belonged to during the period(s) you were contracted out, either:

    you and your employer paid NI at a lower rate than the full standard rate, or

    some of the NI contributions you paid were used to contribute to your private pension instead of the additional State Pension

    Contracting out finally ended on 6 April 2016, and this means that all employees now pay the same rate of NI. If you have been contracted out in the past, we need to take account of this in the amount of new State Pension you get. Do not forget that when you were contracted out, you were building a workplace or personal pension(s) instead of the additional State Pension you were opted out of.
    • uk03878
    • By uk03878 14th Oct 19, 12:26 PM
    • 146 Posts
    • 111 Thanks
    uk03878
    You can verify your contracted out times by writing to the NISPI
    I wrote about 4-5 weeks ago and received a very detailed reply of the times I was contracted out
    They also stated the times I was contracted out but then contracted back in again. Forces Pension - didn't stay in long enough to have one so I have a note that says CEP has been paid.
    The information that I needed and who to write to all came from this forum - excellent resource
    • Silvertabby
    • By Silvertabby 14th Oct 19, 1:31 PM
    • 4,855 Posts
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    Silvertabby
    “ Well, as I understand it, everybody gets the same basic state pension as long as their employer pays their NI contributions – so somebody earning £15k a year for life gets the same as somebody who earns £50k.

    Are you telling me I’m wrong about this??
    Originally posted by hogweed
    That will be correct in the future - ie, once we have passed the transitional introductory period for the new single tier pension.

    Then, although someone on £50K per year will pay more NI than someone on £15K per year, assuming that they both have 35 years of NI contributions then both will get the same State pension.

    It used to be that the State pension was split into two parts - the basic pension that everyone received, and earnings related additional (SERPS/SP2). A high earner (who had never been contracted out of SERPS/SP2) could accrue a State pension of as much as £302 per week, whereas the low earner may only have accrued half of that.

    Of course, in the case of our fictional future £50K/£15K earners the higher paid worker will be much more likely to pay into a works/private pension scheme, and so will have additional retirement income from that.
    • xylophone
    • By xylophone 14th Oct 19, 1:51 PM
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    xylophone
    See post 23 here

    https://forums.moneysavingexpert.com/showthread.php?t=4532605&page=2 for an old scheme explanation.

    You reach SPA under the new scheme.

    At 6/4/16, two calculations were done - it appears that at that date you had 35 years plus NI years.

    Thus

    Old Scheme (which required 30 years for full Basic State Pension which was £119.30 for 2016-17)

    £119.30 + (Additional State Pension - deduction for contracting out)

    New Scheme (which requires 35 years for full NSP, £155.65 for 2016-17)

    £155.65 - Contracted Out Pension Equivalent.

    Your starting amount was the higher of the two.

    You were under state pension age so could increase your NSP by contributions or credits up to SPA.
    • DairyQueen
    • By DairyQueen 14th Oct 19, 2:13 PM
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    DairyQueen
    Well, from the previous link, you will see how indexing works on the old state pension (but you will also note the situation of those who ended up with a COD greater than their ASP).

    With regard to the new state pension, I think we've already been in discussion about how the "starting amount" was calculated.

    If you come under the NSP, then all of your pension up to a full NSP is index linked (currently) under the triple lock - any amount over is a "protected payment" and is index linked under CPI.

    Clearly, there is some ASP within the NSP and to the extent that this is the case, under the triple lock the pensioner is getting at least CPI or better.

    The same comment as above applies as regards CPI/RPI though!

    Those worst affected by the change to the NSP were those occupational pensioners with a GMP who were very close to SPA at the time of the changeover.

    They may well have had high COD/COPE which meant that they received much less than a full NSP with no chance to improve their starting amounts.

    They would then miss out on indexation of pre 88 GMP altogether and would receive only up to 3% on post 88 GMP through their occupational schemes.

    See https://www.nao.org.uk/wp-content/uploads/2016/03/The-impact-of-state-pension-reforms-on-people-with-Guaranteed-Minimum-Pension.pdf

    Those in receipt of Public Service Scheme pensions have been protected from this (at least up to those retiring in 2021).

    See https://researchbriefings.parliament.uk/ResearchBriefing/Summary/SN04956
    Originally posted by xylophone
    Thankyou. I think I understand this now. So, under the nSP, those with GMP who are also able to qualify for the full amount before SPA, will effectively replace their GMP indexation with CPI indexation on a higher basic SP. This is achieved by the opportunity to accrue basic SP beyond what they would otherwise have received under the old system.

    Therefore, those who had a high GMP at the starting point (and a correspondingly high COPE amount) could have their starting amount reduced to a point where it is impossible to increase their basic nSP (which is all index-linked) up to the equivalent of the extra pension they will receive from the GMP scheme (which is zero or max 3% index-linked). The difference will not be index-linked. Is this correct?

    Also, what happens to those whose who accrued pre 88 GMP but whose starting amount was more than the max nSP? Typically, these people would have been contracted out early in the working lives and then contracted in for a substantial period more recently when they enjoyed higher earnings. The high ASP they had accrued under the oSP is protected and is all index-linked. However, under the oSP, they would also have received an additional amount p.a. as indexation of their GMP. Have these people now foregone indexation on this additional amount?

    Hope that makes sense and sorry to keep asking so many questions.
    • xylophone
    • By xylophone 14th Oct 19, 4:09 PM
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    xylophone
    Thankyou. I think I understand this now. So, under the nSP, those with GMP who are also able to qualify for the full amount before SPA, will effectively replace their GMP indexation with CPI indexation on a higher basic SP. This is achieved by the opportunity to accrue basic SP beyond what they would otherwise have received under the old system.
    Have a look at post 9 here

    https://forums.moneysavingexpert.com/showthread.php?p=76375296#post76375296

    The poster (even though he had been contracted out for a period and had not paid NI for a period while abroad) still managed to qualify for a full NSP plus a "protected payment".

    To the extent that there is additional state pension within his full NSP, he is potentially benefiting from a higher than CPI increase.

    The "protected payment" will increase by CPI only.

    Therefore, those who had a high GMP at the starting point (and a correspondingly high COPE amount) could have their starting amount reduced to a point where it is impossible to increase their basic nSP (which is all index-linked) up to the equivalent of the extra pension they will receive from the GMP scheme (which is zero or max 3% index-linked). The difference will not be index-linked. Is this correct?
    Take the position of somebody who reached SPA in 2016 post 6 April and had been a member of a DB contracted out scheme since 1978.

    His starting amount would have been calculated according to the formula - with a high COD/COPE the old rules calculation would have given a higher SA than the new but would still almost certainly be well below the full NSP - suppose it was in the region of £125 a week. He could not improve this because he had reached SPA.

    That would then increase in payment under the triple lock.

    With regard to his occupational pension, his provider would split out the pre 88 GMP/post 88 GMP and excess.

    This would normally mean no increase on his pre 88 GMP/up to 3% CPI on post 88 GMP/ scheme rules on excess.

    Under the old SP, there was provision for indexation on the GMP through the state pension (see links in previous) - that provision ended in the new scheme so that as you can see, somebody in his position was and remains disadvantaged.

    Also, what happens to those whose who accrued pre 88 GMP but whose starting amount was more than the max nSP? Typically, these people would have been contracted out early in the working lives and then contracted in for a substantial period more recently when they enjoyed higher earnings. The high ASP they had accrued under the oSP is protected and is all index-linked. However, under the oSP, they would also have received an additional amount p.a. as indexation of their GMP. Have these people now foregone indexation on this additional amount?
    As above - such a person would have had his SA calculated according to the formula.

    Let's say his SA back in 2016 was £175.65 and he became eligible to draw his SP at the end of the year.

    This gave him a full NSP of £155.65 plus a "protected payment" of £20.
    Since then, his NSP has increased under triple lock and his protected payment under CPI.
    • DairyQueen
    • By DairyQueen 14th Oct 19, 5:44 PM
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    DairyQueen
    So, in the most extreme example, those who were very close to SPA when the nSP was introduced, and were contracted out throughout their working lives (and were not members of public schemes), will not receive indexation (or full indexation) on their equivalent of ASP (i.e. the GMP). However, those who were contracted-in for the same period (and are the same age) will receive triple lock up to the max nSP and then CPI on the amount above that?

    This transition period is a minefield.
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