You may be eligible for a Guaranteed Minimum Pension (GMP) if you were a member of a public sector defined benefit (final salary) pension scheme between 1978 and 1997. Your GMP is the bare minimum of income that this employment pension must pay you in retirement.
What is a Guaranteed Minimum Pension (GMP)?
A guaranteed minimum pension GMP is a minimum pension that is typically provided by a workplace pension programme. It only applies to those who contracted out of the Additional State Pension between April 6, 1978, and April 5, 1997. The GMP you get from a company pension scheme is typically equal to or greater than the Additional State Pension you would have received if you had not contracted out.
The government no longer pays living cost increases on your GMP under the New State Pension.
Each year, pension systems must increase the amount of GMP accumulated from April 1988 to April 1997 in accordance with living costs; this is capped at 3%. This is known as ‘indexation.’ Pension plans were not required to provide indexation for GMPs created between April 1978 and April 1988. To prevent people with GMPs from losing out, the Additional State Pension might be increased to cover living costs. It only applies to those who reached the State Pension age before April 6, 2016.
The new State Pension went into effect on April 6, 2016. You will get the new State Pension if you achieve your State Pension age on or after this date. You will not receive the government’s Additional State Pension, which would have included your indexation. These increases came to an end when the new State Pension was implemented.
Here’s an example of how this could harm you:
- If you received a weekly GMP of £35 in 2015 and inflation was 2%, your Additional State Pension would be 70 pence per week greater the following year.
- If you reach the State Pension age on or after April 6, 2016, you will no longer be eligible for Additional State Pension or these increases.
The weekly loss is minor in the first year, but it can add up over time. Someone with a big GMP who reaches State Pension age between April 2016 and March 2017 may suffer a significant loss over the course of their retirement.
What effect does Private or Public Sector Pensions have on your Guaranteed Minimum Pension?
If you have a private-sector pension and leave before the scheme’s pension age, your GMP may be revalued at a fixed rate until you reach retirement age. This means that your GMP may be greater, and you would not have received indexation from the government as a result.
If you have a public sector pension, any indexation you accrued between April 1978 and April 1988 is safe. It will be covered by your pension plan.
How could you Increase your Pension under the New State Pension?
In 2016, the new State Pension was implemented. It means that certain persons who were contracted out can save up to £2,150 more per year in pension (based on 2021-2023 rates) than they could under the old State Pension.
Adjustments to the State Pension for Living Expenses
Since 2011, the new State Pension has been adjusted each year to match rising living costs, by the greater of:
- the price increase
- the rise in earnings
- 2.5 percentage points
This is referred to as the ‘Triple lock.’ This indicates that the State Pension has grown by £16.80 per week more than predicted (based on 2021-2023 rates).
When does Guaranteed Minimum Pension become due?
A GMP is available to women at the age of 60 and to men at the age of 65. The recent modifications to the state pension age do not apply to a guaranteed minimum pension.
What is the procedure for receiving my guaranteed minimum pension?
A GMP must always be paid out as an annuity, which provides a pension income for the remainder of your life. You cannot withdraw a tax-free lump sum straight from a guaranteed minimum pension (but GMP benefits can be included in any computation of how much tax-free cash you are allowed).
Can I move my GMP?
Transferring a pension consisting of GMP rights is usually available if you desire more choices for obtaining your pension when you retire. However, you will most likely lose the guarantees and death benefits related to your GMP pension if you do. As a result, you should consult with a certified pension expert before proceeding.
Guaranteed Minimum Pension Calculation
The amount of guaranteed minimum pension you are entitled to is determined primarily by the length of time you were a member of the pension scheme, the number of benefits you accrued prior to and after 1988, and the amount of National Insurance contributions you paid.
However, because of the different increments that may be payable based on when benefits were accrued and when they might be received, calculating GMP benefits is tricky. Contacting your pension system is by far the best approach to determine your GMP entitlement.
GMP Revaluation
To compensate for the impacts of inflation, a guaranteed minimum pension will be revalued each year until it may be drawn. The amount of a GMP revaluation depends on your age and whether you are still an active member of the pension system.
Once a GMP pension is in effect, any increases in the amount you receive may be provided by the pension system, the state, or both.
A programme must ensure that any guaranteed minimum pension accumulated between April 6, 1988, and April 5, 1997, is increased by the lesser of inflation or 3%. GMP from before April 6, 1988, on the other hand, does not need to be increased when paid.
What Effect Does Guaranteed Minimum Pension Have on My State Pension?
When you reach state pension age, the state decides whether or not you will receive any increases (SPA). If your SPA is before April 6, 2016, you will receive the old basic state pension, and your GMP will rise in step with inflation. This will be paid through an increase in your extra state pension. If your SPA is after April 6, 2016, and you receive the new state pension, there will be no increase in your GMP.
Transferring Guaranteed Minimum Pension Benefits
GMP rights can be transferred to any other pension plan, including:
- A personal pension plan
- a workplace money-purchase plan
- a salary-related arrangement that is either contracted in or contracted out
- a proper buy-out agreement
- A recognised international pension scheme that qualifies (QROPS)
There may be obstacles that prohibit the transfer from taking place, for example:
#1. Unfunded public sector schemes
Members of unfunded public sector defined benefit schemes cannot transfer to money purchase schemes to get flexible benefits unless their transfer request was made before April 6, 2015.
They may, however, shift to a money purchase scheme if the scheme is unable to deliver flexible benefits. This enables transfers to conventional annuities, which may assist those who are unlikely to gain good value from their defined benefit guarantee, such as those in poor health or single persons who have no need for a survivor’s pension if they die.
#2. GMP in the context of money purchase buy-out contracts
32nd Section Buy out contracts are often money purchase agreements, but they might carry a GMP responsibility. When attempting to transfer from these, the scheme will ensure that the transfer value offered is sufficient to cover the GMP amount, and if it is not, the transfer is typically not allowed. This would be true even if the receiving scheme was not contracted out, and the GMP responsibility would effectively vanish.
If a transfer is forbidden because the value is less than the GMP liability, the fund must remain inside section 32 until the value grows to the point where a transfer is permitted. However, this may never occur, and section 32 will be required to meet the GMP liability when disbursing benefits.
Divorce
If an ex-spouse receives GMP rights as part of a pension-sharing arrangement, they are no longer considered GMP rights and are treated in the same manner as excess benefits.
Benefits upon death
The death benefits awarded under guaranteed minimum pension rights are determined by whether or not the member:
- is he or she single, married, or in a civil partnership
- leaves behind a widow, widower, or civil partner and
- dies either before or after obtaining their GMP
- Member is either married or in a civil partnership.
If the member is married or has a civil partner at the time of death:
- A surviving widow is generally entitled to a pension equal to half of the member’s GMP.
- A surviving widower or civil partner is generally only entitled to a pension equal to half of the member’s GMP earned after April 5, 1988. However, there is no access to a widower’s or civil partner’s pension based on GMP earned before April 6, 1988.
However, there are several exceptions to these rules. For example, if a survivor remarries or enters into a civil partnership before the age of 60 (women) / 65 (men), their GMP may be terminated (men).
The survivor’s GMP from the programme must increase in the same way as the member’s GMP and will be taxed as income if the member dies before the age of 75, beginning on April 6, 2015.
Small survivor’s pensions, including GMPs, can be computed and paid as a one-time lump amount (known as a trivial commutation lump sum death benefit) if the lump sum is less than £30,000.
The member is not married.
If the member is single at the time of their death, there will usually be no benefit payable from their GMP. The only exclusions could be in the following cases:
If the GMP rights are held in a money purchase setting, such as a buy-out contract, a lump sum death payment from the funds underlying the GMP promise may be available.
The GMP comes with a pension guarantee, and if the member dies after retiring during the guarantee term, the pension is guaranteed.
Guaranteed Minimum Pension Balancing
Following a European Court of Justice judgement on May 17, 1990 (Barber versus Guardian Royal Exchange Assurance Group), occupational plans were required to provide equal benefits to men and women beginning on that day.
However, it was unclear whether this meant that GMP benefits had to be equalised as well; GMP was designed to imitate extra State Pension, which did not have to be equalised between the sexes. As a result, the majority of schemes elected to just equalise non-GMP advantages.
In the ‘Lloyds Bank case,’ the English High Court determined on October 26, 2018, that any GMP benefits relating to service from 17 May 1990 to 5 April 1997 must also be equated. The decision may have an impact on both men’s and women’s pensions. Nobody’s pension should be reduced as a result of GMP equalisation.
On November 20, 2020, the High Court issued a new judgement clarifying that GMP equalisation also applies to prior transfers. As a result, pension schemes will need to review any previous transfer payments where the member had accrued GMP prior to 17 May 1990 to see whether any additional value (a ‘top-up payment’) is required.
Why is there Unequal Distribution of Guaranteed Minimum Pension Benefits?
There could be a number of causes for the disparity in GMP benefits between men and women:
- GMP is payable at various ages.
GMP is payable to men at the age of 65 but to women at the age of 60.
- Women accumulate GMP at a faster rate.
Women accumulated GMP at a higher pace than males since they have a shorter maximum qualifying service duration for GMP (44 years against 49 years for men). So, if you had a male and a woman with the same length of service and pension at the time of retirement, the woman’s pension would be GMP to a greater extent.
- Deferment revaluation
Due to the higher share of GMP benefits, the revaluation of GMP benefits is usually higher than the revaluation of non-GMP benefits.
- Payment increases
For the time in question, GMP benefits in payment are required to grow each year by CPI up to 3%, but there is no statutory obligation for non-GMP increases – although, scheme rules will frequently provide for increases.
Due to the varying proportions of GMP accrued, this could favour either males or women depending on the level of non-GMP gains offered (if any).
Method for Equalizing GMP Benefits
There is no single approach for programmes to equalise GMP benefits. The High Court decision specified the number of approaches that may be utilised, and it is up to the trustees and employers of each scheme to determine which method is best for their scheme.
Guaranteed Minimum Pension FAQs
Can I take my GMP as a lump sum?
A GMP must always be paid out as an annuity, which provides a pension income for the remainder of your life. You cannot withdraw a tax-free lump sum straight from a guaranteed minimum pension (but GMP benefits can be included in any computation of how much tax-free cash you are allowed).
How do I find out my guaranteed minimum pension?
GMP earned after 6 April 1988 is calculated by
- dividing the total post-1988 revalued earnings components by the total number of years worked (from 6 April 1978 or 6 April following 16th birthday if later)
- multiplied by 20%.
- divide by 52
Is GMP paid in addition to State Pension?
The GMP and the additional State Pension are linked in the sense that when a person reaches pensionable age, the entire amount of GMP is removed from the total amount of additional state pension built up between 1978 and 1997, and any net amount is paid.
