GMP Rules
GMP is “exactly what is says on the tin” – it is a guaranteed minimum level of pension income. You might have an invested fund through a Section 32 or COMPS (Contracted Out Money Purchase Scheme) or a bigger promised income under a final salary scheme, but if you were contracted out of SERPS (the State Earnings Related Pension Scheme), it will have some Guaranteed Minimum Pension – a minimum level of promised income.
There are a number of rules attached to this and if you keep the pension in that format you, and the scheme will have to abide by those rules.
GMP Increases - before retirement
Deferred Members
If you have left a pension scheme (you are a deferred member) and if the scheme has GMP, then between leaving and retirement (normally 60 for a woman and 65 for a man), the GMP has to increase. The promised income prior to retirement was not frozen, but preserved with additional increases. There were three ways it could increase:
Fixed revaluation
If the scheme had fixed rate revaluation then the income would increase by a fixed amount. The amount depends when you left the scheme. This is listed below and the years are tax years:
Date of leaving revaluation rate:
2017 to 2022 – 3.5%
2012 to 2017 – 4.75%
2007 to 2012 – 4.00%
2002 to 2007 – 4.50%
1997 to 2002 – 6.25%
1993 to 1997 – 7.00%
1988 to 1993 – 7.50%
1978 to 1988 – 8.50%
This can often mean that the GMP can increase significantly. For example: if you left a scheme in 1987 and the amount of income promised for GMP was £100 per year. If you were 65 in 2022 then the income would have increased to £1,737.
Increases in line with earnings
It is also possible that the scheme could have increased the GMP in line with earnings. This is called section 148 orders (or section 21 orders). This means that the promised income would increase each year in line with National Average Earnings (NAE for short). This is less common as many schemes years ago preferred fixed rate revaluation as they felt it would be safer and perhaps cheaper to have known and fixed increases. However, fixed rates in the 80s and 90s ended up being much larger increases than earnings.
Limited Rate Revaluation
This is no longer available, but the scheme would provide increases in line with NAE, but with a maximum of 5% per year (and the Government would pay an increases over that amount).
Delaying Retirement
If you delay taking your pension with GMP after age 65 for a man and 60 for a woman, then the GMP will continue to increase. The increase is 1/7th of 1% for every seven weeks it is delayed. This works out at just over 7% per year.
This will obviously increase the income each year. This can seem tempting, but it does create a “cost of delay”. For example;
Mr Smith has a GMP pension of £1,400 per year. He is 65, and delays it for one year. His new income at age 66 is (roughly) £1,500 per year. So he gets an extra £100 per year. But he has missed out on £1,400 because he delayed it. He won’t get back this “missed” £1,400 until age 80, because it will take 14 years to make up with lost money with each extra yearly £100.
So, for anyone delaying their GMP after state pension age (60 for a woman and 65 for a man), you need to think carefully about whether this delay is worthwhile.
Increases after retirement
Once you start taking benefits from a pension with GMP then it might increase once it it starts being paid. This would usually only happen after age 65 for a man and 60 for a woman. However, this depends upon whether you have pre 88 and post 88 GMP and it is possible you could have a bit of both.
Pre GMP is GMP that you earned (accrued) when you where in a pension before 1988, and Post 88 GMP is the GMP you earned after 1988. (You could have both elements in a pension too; for example if you where a member of such a scheme between 1986 and 1990, then you would have pre and post 88 GMP).
Pre 88 GMP increases – legally this GMP does not have to increase in payment. It will generally not increase once it starts to be paid. (A few schemes might pay increases but this is not that common).
For those who retired with their GMP in payment before April 2016, then the Government could pay inflationary increases on the pre 88 GMP. However, this would only happen when the benefits you would have had under SERPS was greater than the GMP. But SERPS would have increased in line with earnings, and your GMP might have increased by as much as 8.5% per year. In which case the GMP would be much bigger than the SERPS. So in this scenario it could be a long time until the SERPS entitlement exceeds the GMP.
Post 88 GMP
The law does however require Post 88 GMP to increase. This is a legal requirement. It must increase each year by inflation (but with a cap of 3%). So, the scheme are responsible for it increasing up to 3% per year or inflation, (but no greater than 3%). So if inflation were 4% the scheme would only have to increase it by 3%. The Government would make up the difference. If inflation were just 2%, then the scheme would pay a 2% increase.
This can be expensive to secure. If you have a Section 32 it can mean you have a low starting income that looks poor value. See Annuities and GMP for more details.
Spouse's benefits
The Guaranteed Minimum Pension rules on spouse benefits are quite straightforward. The law requires that there must be a 50% spouses pension for a man’s GMP for both pre and post 88 GMP. This means that the income would halve on death and continue at this reduced rate for his wife.
The same applies for a woman but only for Post 88 GMP (GMP earned/accrued after 1988). The law does not require pre 88 GMP for a woman to have any benefits for her husband if she dies.
The requirements to provide a pension to a husband or wife apply even if you are not married. This option would have to be factored into any GMP. If you have a Section 32, the cost of this could be met by you, even if you are single. If you have a final salary scheme this cost is met by the scheme.
It is sometimes possible to transfer the pension away to lose the GMP, and either take benefits flexibly or buy an annuity of your choosing, so you could, after transfer, buy a single life annuity (which would pay no income to a wife or husband), or perhaps a joint life 100% annuity (which would pay the same for both a husband and wife). See Section 32 Transfers to find out more about transferring a Section 32 to access alternative benefits.
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.