COMPs

Comps is short for Contracted Out Money Purchase Pension Scheme.  These type of schemes worked like a personal pension. Money was invested, and most people would have bought an annuity (guaranteed lifetime income). These are no longer available, but there are some old ones still around. 

Like final salary schemes these were employer run schemes, and you and your employer would probably have contributed. Unlike a final salary scheme there was no promise of the amount of income it would provide on the entire pot. 

If you were a member of this scheme then you would have given up your right to the second state pension when you were paying into it. In return you would have paid less National Insurance contributions, and the saving could have been invested in the pension.  

Prior to 1997, if you were a member of this type of scheme, you would have not been part of SERPs (the second state pension). But what this meant was that you would have accrued some Guaranteed Minimum Pension instead. 

So, in a nutshell, you would have had a pot of invested cash and some element of GMP (guaranteed income). 

This is often referred to as a Contracted Out Money Purchase Scheme with GMP underpin. 

Taking benefits from a COMPs with GMP

If you have a COMPS with a GMP element (GMP underpin), when you take benefits, you would in the past have had to have bought an annuity, a guaranteed income for life. 

The first thing would be to buy an annuity that would provide the GMP income.  Any more left over would have then been used to provide tax-free cash and an income over and above the GMP. It would work in much the same way as a Section 32.  See Retiring with a COMPs for more information. 

Disadvantages of COMPS with GMP

The main disadvantage of having a Contracted Out Money Purchase scheme with GMP is that you would, in the past at least, be expected to secure the GMP.  (But the GMP for some people is an advantage). 

The GMP income comes with its own rules and regulations. The issue is that the requirements it has might not suit your circumstances. Such as:

  1. You have to buy a joint life annuity of 50%. What this means is that the income you receive would have to continue for a husband or wife, even if you are not married, at half of your pension. You might not be married, but would still have to include this. You might also want to have the option of no income continuing for a spouse, or to have no reduction on death. For the GMP element, you have no choice! 
  2. The GMP increases are set in law, and you can’t vary this. This can be a problem for many people, especially with post 88 GMP. If you have post 88 GMP then the income, once in payment, has to increase by inflation, subject to a maximum of 3% per year. This can be expensive. You might for instance have £2,000 per year of Post 88 GMP, and a pension pot of £100,000.  Suppose the cost of securing this income is £80,000. Many people do not see this as good value. Ignoring the inflation increases, you would have to live 40 years to get back the £80,000 the £2,000 per year has cost you to buy. If inflation is low, it will increase slowly. Even if inflation were 2% per year, which is the Bank of England’s target, then after 10 years a £2,000 per year income would only have increased to  £2,437.   
  3. It could also mean that it can restrict tax-free cash. Using this same example, as the GMP income has cost £80,000 of the fund, this would mean that you could not take tax-free cash of £25,000. There is only £20,000 left over, so tax-free cash is restricted to this amount.

There is a way to get around the GMP requirements. This would involve transferring the COMPs with the GMP into a personal pension. This would remove the GMP requirements, and give you more choices. In some instances it can give you a bigger transfer value than the actual fund value. See transferring a COMPS with GMP for more details.  

For more details on the disadvantages of GMP see Disadvantages of GMP. 

Advantages of COMPS with GMP

The main advantage of having GMP with a COMPs is that regardless of the fund value, you will have a guaranteed income. 

It is possible that the value of the fund is not big enough to buy the promised income. This would be a liability for the scheme (and usually employer too). 

Again, an example might help. Suppose Mrs Smith is retiring at age 60.  She has a pension pot of £50,000. She has £2,000 of pre 88 GMP, and £1,000 of post 88 GMP. 

The cost of buying an annuity to pay for this income is as follows:

£2,000  Per year pre 88 GMP – costs £50,000
£1,000  Per year post 88 GMP – costs £40,000

So, the total cost of buying this income is £90,000, but she only has a pot of £50,000. She is 60, and the retirement age for a woman with GMP is age 60. The scheme has to provide her with a £3,000 per year income even though the pot is just £50,000.  

She gets an income of £3,000 per year for a pot of just £50,000. This is far better than the rates that can be secured on the open market. 

However, there may be another option in these circumstances. If your fund value is not big enough to secure the income then it is sometimes worthwhile to  to ask the scheme for a Cash Equivalent Transfer Value, or CETV for short. This is a cash value which can be transferred. 

The CETV could either be the value of the fund, or a value calculated based on the cost of the income (whichever is the higher).  This means that the scheme would give you a full fund value as a transfer or if, as in the example of Mrs Smith, when the fund is not big enough to pay for the income, a value equivalent to the cost of the income (as calculated by the scheme). Therefore, the scheme could offer Mrs Smith £90,000 as a transfer value (it would be unlikely to be this high in reality).  See COMPs Transfer for more details. 

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.