Disadvantages of GMP

Despite having a guaranteed income under GMP, and many other guaranteed features and benefits, there are a number of disadvantages of having GMP in a pension. 

GMP Problems - Overview

Sometimes these guarantees  can be a problem to you as it can mean:

  • The guaranteed minimum pension could stop you from retiring early
  • The guaranteed minimum pension could mean there is no lump sum (or a reduced lump sum)
  • You might not be able to transfer your pension
  • With a section 32 you might find that pension funds that do not relate to the GMP, are then used to pay for the GMP

GMP Income

When you take GMP income, it has to be on a set basis. There is no flexibility in the type of income it provides. Pre 88 GMP cannot increase, post 88 GMP has to increase. The advantage of having an increasing pension is this gives protection against inflation. But, it is expensive to provide. So, if for example you have a Section 32, and your fund has to provide an increasing income, then you will use more of your fund to provide this income. If you bought an income without increases you would get much more (but it would not increase). But GMP rules prevent it, unless you transfer the GMP.   See GMP Rules for more information. 

GMP Spouse's Pension

GMP Income – when you retire the income is on a predefined basis. It normally has to be joint life 50%. This means it pays the full rate for you but would drop by half for a widow or widower if you died, (but please note, sometimes pre 88 GMP for a woman sometimes does not have widowers benefit).

Even if you are single man, any GMP you secure has to be set up to pay a widow half of your income if you die. This does cost more, and can seem like a pointless costly requirement for a 65 year old single man.
Also it is not possible to increase the spouses benefits on a plan for the GMP element. It cannot be “upgraded” to include a pension that does not change in the event of your death. 

Tax-free cash and GMP

Tax-free cash – GMP cannot be used to provide tax-free cash. This can be a problem for many people with GMP in their pension.

In a final salary scheme retiring early often means a reduced pension. But a pension cannot be reduced below the GMP. This can mean that the tax-free cash can be reduced because the pension cannot be reduced any lower then the promised Guaranteed Minimum Pension.  

Some final salary schemes (especially if you left before 1985), can just be a pension made up of GMP, and so can’t provide any tax-free cash.  Find out more about GMP and Lump Sums

The main disadvantage of GMP in a final salary is that it can stop you from retiring early, or reduce the amount of tax-free cash. It is sometimes possible to transfer such a scheme to remove the GMP requirement, but this would mean losing the guarantees and other benefits, which would be unlikely to be suitable. Find out more about final salary schemes and GMP. 

In a Section 32 the pot must be used first to provide the GMP income, and only then, if there is money left over can a tax-free lump sum be taken. This can sometimes mean little or no tax-free cash can be paid. Sometimes you can transfer a Section 32 with GMP to remove the GMP requirement and do what you want with the fund.  Find out more about Section 32s and GMP.

Sometimes it is possible to transfer a pension with GMP in order to get a lump sum, or increase the lump sum.  Although this is not always the case. Read more on GMP and Section 32 transfers.

GMP and Early Retirement

Having GMP with a pension can prevent someone from retiring early. This applies to both a Section 32 and a Final Salary Scheme. 

It is only possible to retire early in either scheme if they can ensure the guaranteed income is payable from the GMP age (60 for women and 65 for men). 

As mentioned above retiring early from a final salary scheme often reduces the starting income. But, the scheme cannot reduce it to below the amount that must be guaranteed by the GMP.  So a pension cannot be paid early if it would be less than the GMP. 

Similar considerations apply to a Section 32 too. The pot has to be big enough to buy the promised income. If it is not, then it is not possible to retire early. Sometimes the pot will never be big enough to buy the income before normal retirement age in which the insurance company have to secure it at the normal retirement age, but this for many people is an advantage of having the GMP – it could give more income than the pension value could provide. 

Solutions

Sometimes there is no solution to these problems and you have to take the GMP income from the scheme, sometimes it is a case of just waiting. However it is also possible to sometimes transfer the pension with GMP and lose the guarantees on offer. But this does mean losing very valuable guaranteed benefits.  This would ultimately mean transferring the pension. Find out more about Section 32 transfers and final salary scheme transfers

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.