GMP and Annuities
If you have a Section 32, when you want to take benefits you could look at buying an annuity.
The process for buying an annuity is different for a Section 32 with GMP than it is with say a personal pension.
There are only a few companies that offer an annuity to provide GMP. So it is quite a small market.
The process starts off by working out how much it would cost to pay the GMP income. Then, if there is any left over, this can pay out tax-free cash and more income.
An example might help.
Mr Smith is 65. He has a Section 32 with GMP. The details and requirements are listed below:
| Amount | Description |
|---|---|
| £100,000 | Fund Value |
| £1,000 | Yearly Pre 88 GMP Income |
| £500 | Widow's Yearly Pre 88 GMP Income |
| £1,000 | Yearly Post 88 GMP Income |
| £500 | Widow's Yearly Post 88 GMP Income |
So he has to ensure that the pension will be at least £2,000 per year, and this will halve on his death to £1,000 per year for his spouse (a joint life 50% annuity). The Pre 88 GMP does not have to increase once it starts to be paid, but the Post 88 GMP has to increase in line with inflation, subject to a maximum of 3% per year (and this will cost more of the fund to pay for). These elements are compulsory for the GMP.
The first thing to do is work out the cost of providing the GMP. Suppose the insurance company said that the pre 88 GMP would cost £25,000 to provide, and the post 88 would cost £40,000 this means that £65,000 of the pot is used to pay for the GMP.
He can then take 25% of the entire pot as a tax-free lump sum. The entire pot is £100,000 so he can take £25,000 as a tax-free lump sum.
So far then, the GMP has cost £65,000, and the tax-free cash is £25,000. So he has used £90,000 of the pot. He has £10,000 left. With this he can buy an annuity of his choosing. It can be joint life 100%, or indeed single life. It can be with increases or one that does not increase.
Reduced Tax-Free Cash
Sometimes the tax-free cash can be restricted to less than 25% of the pot. This would happen if more than 75% of the pension pot was needed to pay for the income. Carrying on the example above, suppose the fund value is only £80,000.
He needs £65,000 for the cost of the GMP. This means that as the pot is only £80,000 there is only £15,000 to buy other benefits, or take as a tax-free lump sum. So in this example his £80,000 would provide £15,000 tax-free cash and an income of £2,000 per year.
No tax-free cash
Often it is the case that there is no tax-free cash with a Section 32. Again, another example using the GMP above might help. Suppose the fund value is only £65,000.
In this instance all of the fund is used to pay for the income, and there is nothing left to pay as tax-free cash or any additional income. The entire £65,000 is needed to provide the income.
Guarantees
Remember too, even if the fund value is too small to pay for the income, at 65 Mr Smith, in the example above, would still get the £2,000 per year. This would be provided by the insurance company. So, even if the fund value was only £45,000, the insurance company would have to provide the £2,000 per year income.
This is the key benefit of keeping the GMP, it has very valuable guarantees.
GMP Basis
| Amount | Description |
|---|---|
| £70,000 | Total Pension Pot |
| £0 | Tax-Free Cash |
| £0 | Remaining Fund |
| £2,000 | Yearly Increasing Income |
The income would increase by inflation with a yearly maximum increase of 3%. Inflation increases over 3% would be met by the Government.
Section 32 Transfer - Annuity Purchase
Sometimes it is possible to transfer a Section 32 with GMP, and use the proceeds to buy an annuity. See Section 32 transfers for more information.
The two main reasons you might want to do this is that the you can choose the type of income you want, and tax-free cash becomes 25% of the fund value.
Again, another example, using Mr Smith from above might help, and we’ll assume the fund value is £80,000 again.
Annuity With GMP Income
£80,000 Fund Value
£1,000 Yearly income (fixed)
£1,000 Yearly income (increasing)
£2,000 Total Income
£15,000 Tax-free cash
In this example, Mr Smith has to buy an income that would continue at half his level for a wife – even if he is not married.
Remember, it costs £65,000 to secure the income, and this is why there is only £15,000 to pay as tax-free cash.
Annuity Using a Transfer (no GMP)
£80,000 Fund Value
£2,400 Yearly income (fixed)
£0 Yearly income (increasing)
£2,400 Total Income
£20,000 Tax-free cash
In this example, Mr Smith transfer his pension. This removes the GMP requirements. So, he can then take 25% of the pot as a tax-free lump sum, and can buy any type he wants, including his wife or excluding her.
As you can see, in the comparison above, making a transfer increases tax-free cash to 25% of the fund value. It also means that any annuity can be bought. Upon transfer in this case, a level annuity is bought. This will not increase, but it does give a much bigger starting income, (and £5,000 more tax-free cash). This is because the cost of an increasing GMP income is so expensive, that much more of the fund is used to secure just £1,000 per year for an increasing income.
Other Transfer Options
If you transfer a Section 32 with GMP, then it is also possible to look at other pension options such as taking the entire pot, or entering into flexi-access drawdown. See Section 32 transfers for more details.
Best deal annuities
As always is the case, if you are looking at buying an annuity, it is always worth shopping around.
Different providers offer different rates, and you could be better off using another company.
Remember too if you have had medical issues then make sure that these are considered too, as you could get a bigger income as the insurance company pay out more as they think you might die sooner!
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.