Updated 03 September 2020
You might have a Guaranteed Minimum Pension (GMP) only if you were a member of a defined benefit (final salary) public sector pension scheme between 1978 and 1997. Your GMP is the minimum amount of income that this workplace pension must provide you in retirement.
Members of defined benefit pension schemes between those dates were automatically removed from part of the state pension, known as the State Earnings Related Pension Scheme (SERPS). This was called being ‘contracted out of SERPS’. To ensure that these members did not lose out as a result, the government guaranteed them a minimum pension broadly equivalent to the amount they would have received if still in SERPS.
The GMP only applies to scheme members who were contracted out automatically by their pension scheme. If you contracted out of SERPS via a defined contribution workplace or personal pension, you are not entitled to the GMP.
A contracted-out salary-related (COSR) scheme is a defined benefit schemes that contracted out of SERPS (later called the State Second Pension) before 2016. Note that not all COSR schemes offer a GMP, as this only applies to memberships between the dates of 1978 and 1997. However, between 1997 and 2016 a number of schemes still automatically contracted their members out of SERPS/the State Second Pension. From 1997 onwards, the GMP was replaced by the Reference Scheme Test.
The Reference Scheme Test was introduced from 1997 to ensure that the benefits provided by some workplace pensions met a certain recommended level. Generally it requires that a pension scheme must provide at least 1/80th of your earnings multiplied by your years of membership, with a spouse’s pension of half this level if you pre-decease your spouse. If the scheme passed the test, it was allowed to be contracted out.
If you qualify for a GMP, it will be paid from your 60th birthday if you are woman, or your 65th birthday if you are a man. In this respect it is not affected by increases in the state pension age.
GMP is always paid as an annuity, a guaranteed income for life. You do however have a choice of annuities, as you can choose the ‘open market option’ and shop around for the provider that offers the highest income. Your financial adviser will be able to explain your GMP annuity options.
Your GMP is worked out based on your level of NI contributions, the length of time you were in the pension scheme, and how much of this was pre-1988 and post-1988. It is best to ask your scheme exactly how much you will receive, as the calculation is not a simple one.
GMP can only be paid as an income via an annuity. If you want extra flexibility as to how to access the GMP portion of your retirement savings, then you will need to transfer it.
You can transfer a GMP to a personal pension schemes just like some defined benefit pensions. However, it will not always be the best course of action. For example, you will lose the guaranteed income and the death benefit features of your GMP should you choose to transfer out. You will need to consult a financial adviser if you are considering this option.
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