GMP and Insurers
Over the years, as a company we have dealt with many policies with Guaranteed Minimum Pension (GMP), normally these involve policies known as Section 32s, or Buyout Bonds. These have been some well known insurance companies, such as:
- Standard Life
- Scottish Equitable
We are often approached with problems about Section 32s, and the solution is to remove the GMP (just remember the GMP is a guaranteed income at age 65 for men, and 60 for women).
There are sometimes a number of alternative options if you want to remove the GMP from your pension, and you might want to do this, if you:
- want to have a lump
- want to take your pension early
- have medical problems
- wish to exclude your wife from the income
- want to provide better benefits for your wife
- want to remove the inflation costs
- are a women with pre 88 GMP and want to protect your husband
- you want to eventually take advantage of the proposed 2014 Budget changes
If you have a pension and want to discuss it with us, then please contact us on 0800 011 2713.
History of Section 32
Section 32s were introduced in the mid 80s. They were designed to accept transfers from occupational schemes. Most of those from the 80s and 90s we have come across tend to include GMP. This GMP was originally accrued through a final salary scheme, and then transferred across to the Section 32.
The theory behind them was that rather than leave the pension with an old employer, the money would be transferred, and then invested. The expectation was that the investment growth would give a better pension than leaving it with an old employer.
Upon accepting a transfer from a contracted out final salary scheme into a Section 32, the insurer would still have to promise to provide the GMP. The GMP is an annual income at age 65 for men and 60 for women. Very often they would take the transfer and stipulate that an amount of that had to be invested in a certain way (usually in a low risk with profits fund). The aim was that this element would pay for the GMP income, and could be called something like "reserved" or "protected" units.
The remaining money would also be invested, and often contractually you would have had more freedom as to the type of fund, and this element would then be called something like "non reserved".
However, the problem we are approached with the most, is that the fund has not grown well enough. For example, in you had a fund of say £100,000, and a GMP income requirement of say £6,500 and were 65, many schemes would not give you any tax-free cash.
Most people would expect they would get 25% of the fund as a lump sum, or in this example £25,000. However the insurers are legally bound (in this format) to provide you with an income of £6,500 per year. Let's say it cost £100,000 to provide £6,500 to provide this income (which they must do because of the GMP), there would be no money left over to provide a lump sum. If it cost £110,000 to pay for the £6,500, then the insurer would have to cover the difference.
If it only cost £90,000 to provide the £6,500 then you could, potentially have a lump sum of £10,000.
There is potentially a way to increase the lump sum up 25% of the fund value in these instances.
As Independent Financial Advisers, we can help. If you have a question about GMP or want to chat through what it means for you in more detail, then contact us online
or phone 0800 011 2713.
GMP and the State Pension
One thing to remember when you have a pension with GMP, is that the State is potentially responsible for some inflation protection. Most schemes will not pay any increases at all on the GMP accrued before 1988 (pre 88 GMP as it is called). However, the State might. However, this is even more complex, as it will also depend on the SERPS you gave up when you accrued the GMP. The Government will look at what SERPS you would have had (which only increases with earnings to retirement age) and compare that to the GMP (which might have been increasing by as much as 8.5% per year). Only when the SERPS is greater than the GMP, will the Government pay inflationary increases on it.
We probably get the most phone calls about Section 32 policies. The most common problem is that there is a restriction or no tax free cash, or the client cannot retire early.
Sometimes it is not possible to do anything, and sometimes we have been able to help in arranging something more suitable for our client.
CIS (Coop or Cooperative Investment Services)
The CIS have recently had their pension business bought by Royal London. It would seem to me that they are now a company keen to get rid of the GMP liabilities that they hold.
The CIS are currently (February 2014), giving customers what they call "fair transfer values". This is a transfer value that they claim reflects the mathematical cost/value of the GMP. Therefore it is then it is possible to transfer this away. The "fair transfer values" we have seen have been much higher than the actual fund values. But in our view the transfer values have been far lower than the value of the benefits given up, and generally the benefits are best left with the CIS.
There are a number of many complex issues with GMP, and an Independent Financial Adviser we can help. if you want to discuss in more detail, without obligation then please contact us now online
or call 0800 011 2713.
If you can't find the information you're looking for on the website, or you want to know more or have a question, or just
want to chat through some details about your pension then please feel free to contact us, without obligation.
Either contact us online or call 0800 011 2713.