COMPS Transfer

It is usually possible to transfer out of a Contracted Out Money Purchase Pension Scheme (COMPS).  If this has GMP this can have a number of advantages. 

One of the main advantages is that it would mean that you can remove the GMP requirements. 


Why lose GMP?

The main reason why someone might want to remove GMP from their pension is so that they do not have to buy an annuity which they would not have chosen. 

If you have a COMPS with a GMP requirement, then when you come to retire you would first have to first ensure you secure the GMP income.  Remember you have a pot of cash invested, but a requirement to buy a certain amount of income, and this income follows certain rules. See GMP Rules for more details. 

What it could mean is that you have to buy an inflation proofed income, which is expensive, or it could restrict the amount of tax-free cash, or not provide adequate benefits for a spouse. 

But of course there are some advantages of keeping the GMP, particularly if you have a large amount of GMP income and a small pot – see Retiring with a COMPS.


Transfer values

The transfer value you get is usually based on the value of the pot.  This is then transferred to a new scheme, where it effectively becomes a personal pension (which can be used in more flexible ways). 

Sometimes however, you might be able to get a Cash Equivalent Transfer Value. This is a value based on the cost of the GMP income that is promised. 

So, supposing you had a pot of £50,000 but a GMP income requirement of say £4,500 per year of Pre 88 GMP. This is income that would not increase. 

A pot of £50,000 would not be enough to buy an annuity paying £4,500 per year. The scheme would still have to provide you with this level of income.  You could have the option to ask for a transfer value based on the cost of the income. 

The scheme actuary would calculate this. This is a complex mathematical process. The first step is to work at how much the income would be at retirement age, and then work out how much this would cost at retirement age. This figure is reduced to factor in some investment growth between the scheme retirement age, and the time of transfer. 

This figure would then be available to transfer. 

So, here’s an hypothetical example. Mr Smith is age 60. His GMP at age 65, the scheme retirement age, will be £4,500 per year of pre 88 GMP. 

The actuary calculates that this would cost £90,000 at age 65 to secure.   

If he was looking to take a transfer at age 60, the actuary would reduce this based on estimated investment growth between age 60 and 65. Putting it another way how much would you need to invest today to grow into £90,000.

Suppose, the actuary thought investment growth would be 5% per year, this would reduce the £90,000 down to around £70,000. So, rather than get a transfer of £50,000 he should get a transfer of £70,000. 

In this instance he would get a bigger transfer value, greater than the fund value. But, this would not be enough to buy an income of £4,500 per year! He would lose that guarantee. 

Suppose however, Mr Smith asked for a transfer at age 65, the £90,000 would not be reduced, as he is at the scheme retirement age.  However, it would be unlikely that the transfer value would be enough to pay for an income of £4,500.  This is because the cost of the income is not based on market rate annuities, but the actuarial cost. 

So, why would someone rather have a transfer of £90,000 rather than an income of £4,500 which would cost £100,000 to secure? 

Well, that would depend on personal circumstances. If income was your priority, and having it continue at half the amount to your wife/husband, then taking a transfer might not make sense. 

But if you wanted tax-free cash, then you might. The £90,000 would give you:

£90,000      transfer value
£22,500      tax-free cash
£67,500      remaining fund value

The remaining £67,500 can be used to buy an annuity. This could be single life (no spouse’s benefit), or joint life 100% spouse’s benefit (no reduction on death).  You could even buy an annuity with value protection, which is a money back guarantee on death. 

If you did not want an annuity, then you could have a flexi-access drawdown contract and withdraw some of the remaining fund, or withdraw all of the remaining fund (minus tax). 

If you were in ill health, then the transfer could be more attractive. This is because the death benefits would be based on the value of the pot, rather than just a joint life annuity that would halve on death (although you could have a five year guarantee with the GMP). 

The key point is that it would give you more choice to meet your circumstances.  But, the key point to remember is that you would be unlikely to get the same amount of income upon 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.