Understanding the Guaranteed Minimum Pension (GMP) Benefit
This is where we get to stretch our pension-geek muscles a little. Buckle in.
GMP benefits are a form of ‘contracted-out’ benefit.
If you ‘contracted out’ of the UK State Pension, that means as a high earner and higher rate taxpayer, you opted for your extra National Insurance payments to be redirected to your own company or private pension plan, rather than building additional State Pension.
At some point, you will have ‘opted’ to direct your additional state pension benefits to your pension. This was often done as part of the membership criteria for company pension schemes.
What are GMP benefits?
GMP stands for ‘Guaranteed Minimum Pension’. The means a guarantee is inherent in your pension fora minimum income at retirement. There are rules associated with GMP benefits, they are typically honoured only at age 65 for men and 60 for women.
If your scheme holds GMP benefits, then it is important you know their breakdown. In some cases, GMP benefits are a small and negligible part of the pension as a whole. Some only hold GMP benefits in their scheme, as a ‘contracted out-only’ plan.
What are Section 9(2b) rights?
Section 9(2b) rights are benefits accrued after 1997 under a scheme contracted out under the “Reference Scheme Test” and must guarantee a minimum level of income, calculated by reference to salary.
Transferring Pension Benefits
A pension fund can be transferred to an alternative provider, but most modern pensions cannot accept or honour GMP rights. If your pension contains GMP rights, it is important that you understand your GMP rights would be lost upon transfer of benefits. Before transferring GMP benefits, check what you could be losing – and ensure any new plan will improve your planning as a whole.
What are the key benefits of GMP?
GMP rights are valuable mostly due to their inflationary benefits up to retirement.
After retirement age, when your pension income is live, inflation can be poor or none available at all, but up to retirement, early GMP benefits carry high fixed inflation measures. In some cases, this can be as high as 8.5% pa.
In brief, the ‘earlier’ your GMP benefits were accrued, the better your inflation measures will be. Essentially, SERPS contracting out benefits are much more valuable than S2P. This is why when researching pensions, we must ask specific and technical questions. The breakdown of GMP benefits held in your pension becomes a vital piece of information when a pension specialist conducts their analysis calculations.
To research your pensions correctly, and assess whether your plan contains GMP benefits, use our FREE pension research toolkit.
