GMP Explained - Guaranteed Minimum Pension Explained

GMP Explained

There’s no doubt GMP, or  Guaranteed Minimum Pension as it is known, is complicated. This website aims to explain how GMP works, and what it means if you have a pension with GMP. If you want advice on your pension, we can help, we’re a UK independent financial adviser called Pensions and Annuities Ltd, just contact us for a free initial conversation. 

Why does my pension have GMP?

If you have a pension that has an element of Guaranteed Minimum Pension, then you must have been contracted out of the SERPS. SERPS is short for the State Earnings Related Pension Scheme. Between 1978 and 1997 in the UK it was possible to accrue a second state pension, as well as the basic state pension. This second pension was based on a proportion of earnings. 

Instead of being part of SERPS it was possible to contract out (in other words not be part of it, but be in another scheme). And most people who have GMP would have originally been contracted out through a final salary scheme.  The idea was that if your employer’s scheme provided a pension that would pay a similar pension to the GMP, you could join that instead. But the scheme had to promise that it would meet certain criteria, and had to guarantee the GMP. 

What is GMP?

Guaranteed Minimum Pension is exactly what it “says the on the tin”. It means that some or all of your pension must guarantee a minimum level of income. This income has to be paid at 65 for a man, and 60 for a woman.  It also has to increase from when you leave a scheme until when you retire.  In fact there are a number of GMP Rules that must be followed. 

Pensions with GMP

There are three main  types of pension which might have Guaranteed Minimum Pension.

  1. Final Salary Schemes – also known as Defined Benefit Schemes, these were very common in the 1980s and 1990s. These were schemes provided by employers and promised a pension based on your salary level and how long you were in the scheme.  Find out more about final salary schemes and GMP
  2. Section 32 Plans – also known as buyout bonds. These plans once only accepted transfers in from Final Salary Schemes. Section 32 plans had to promise to pay the GMP. See Section 32s for more details. 
  3. Contracted Out Money Purchase Schemes with GMP Underpin. These schemes, also known as a COMPS, are pensions with a pot of invested money. You and your employer would probably have both paid in. The amount of pension it would give you would depend on the value of the pot. However, it had to promise to pay the GMP too. The idea was that the pot would be used to buy an annuity (guaranteed income) that would pay for the GMP and benefits over and above this level. If the fund was not large enough to buy an annuity then the scheme had to make up any shortfall and ensure that the GMP was paid.  
Find out more about GMP

Lump Sums & GMP

Many people only realise they have GMP when they want to take benefits. Often they’re disappointed to hear that they either can’t retire early, or that there is little or no tax-free cash……

GMP Pros & Cons

If you have a pension with Guaranteed Minimum Pension, then you have a pension with valuable guarantees. You will have a pension which will guarantee to be paid to you regardless of the fund size or s……

Section 32s & GMP

It is very common to find GMP as part of a Section 32 contract. Section 32s,  or buyout bonds as they are also known were introduced in the mid 80s. At that time they could only accept transfer……

If you have a pension with GMP and want advice,  or have a question, or just want to have a chat about it with a UK Qualified Independent Financial Adviser, then  phone now on 01793 686393 or contact us online. 

This website is brought to you by Pensions and Annuities Ltd, a UK independent financial adviser specialising in pensions. 

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