Advantages of GMP

If you have a pension with Guaranteed Minimum Pension, then you have a pension with valuable guarantees. You will have a pension which will guarantee to be paid to you regardless of the fund size or specific scheme rules, and all of these guarantees are a legal requirement.

Guaranteed Income

One example of the value of these guarantees is GMP within a Section 32. You might for example have a guaranteed GMP income of say £2,000 per year of pre 88 GMP, and a pot of just £20,000. Based on current annuities (the product you can buy to provide a guaranteed pension income) you would not be able to get an income of £2,000 per year with a pot of £20,000.  Current market rates would normally only give you an income of  less than £1,000 per year.

If you have GMP income of £2,000, you have a promise that it will be paid by the Section 32 company. This means that they are responsible for paying that income at the relevant time. In this situation, you have a promised income that you could not get elsewhere.

It is also sometimes possible with a Section 32 to vary the underlying investments. If the contract has GMP, then it might be an option to opt for a higher risk investment, but knowing you have a guaranteed income. 

If we continue the example above. You would be guaranteed £2,000 per year, even if the fund was not enough to buy that level of income. So, as an investor, you could if the plan allows it, switch your fund to one that is higher risk. If it fails to grow, then you would still be guaranteed £2,000 per year. So, in some ways this guarantee acts as a safety net, and could allow you to take more risk than you would normally. 

Guaranteed Increases

If you have a pension with GMP, whether it is a final salary scheme or a section 32, the longer you delay taking it, the more the income increases, and GMP accrued after 1988 also has to increases once it is being paid. .

Increases before retirement age

When you stopped being a member of a scheme with GMP, the rules ensure that it increases. Depending on when you left these increases could be as high as 8.5% per year.  For example, if you are a man, and you left a scheme in March 1987, at age 30, and you had £100 per year of GMP, and the scheme had “fixed rate revaluation”, then it would increase by 8.5% per year. The £100 would have increased to £1,700 per year at age 65.

Regardless of whether this is GMP in a section 32 or part of a final salary scheme, this is an increase that is promised. (The amount of increase depends on the scheme rules, and also when you leave – See GMP Rules for more details).  This is a clear advantage of having GMP, you have guaranteed increases. 

Increases after retirement age

If you delay taking a GMP pension after retirement age, then the income increases by just over 7% per year. Strictly speaking it is 1/7 of 1% for every seven weeks you delay it. This means that it if you are a woman and you delay taking your GMP pension at age 60 until age 65, then every £100 will have increased to £142 per year (42% increase). The same would apply for a man, but from age 65. 

Increases in payment

Pension with GMP also has some inflation protection too. There are two types of GMP – GMP accrued before 1988 and GMP accrued after 1988 (and it is possible to have both elements). In the pension industry we call them “pre 88 GMP” and “post 88 GMP”.
Pre 88 GMP does not increase once it starts to be paid. Post 88 GMP increases once in payment. The rate set by law is inflation (as measured by CPI) with a maximum each year of 3%. However, some Section 32 providers provide a fixed 3% per year.

Spouse's Benefits

In the event of GMP holder’s death, a widow, who had been legally married will be entitled to 50% of the spouses GMP income (they’ll get half of what the husband had been paid each year).

For widowers and civil partners only the post 88 has to provide a 50% spouses pension.

For many people these guaranteed death benefits are an advantage of GMP. But for some they are a disadvantage. 

Despite the many advantages of GMP, there are a number of disadvantages of GMP, and these tend to be the fact that it can reduce or prevent tax-free cash, or that the income it has to provide is set by law. Find out more about the disadvantages of GMP.  each 

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.