What is GMP?
GMP stands for Guaranteed Minimum Pension and is a defined benefit. This means it is a specific guaranteed amount of pension and is payable from age 60 for females and 65 for males. The amount payable is calculated by HM Revenue & Customs (HMRC) and does not depend on investment return.
Previously, the government allowed employers that offered defined benefit schemes to ‘contract out’ their staff. This means they would pay a reduced rate of National Insurance Contributions towards their State Earnings-Related Pension Scheme (SERPS). The State Earnings-Related Pension Scheme ran from 6th April 1978 to 5 April 1997.
In exchange for paying lower rates of National Insurance, the companies promised that their pension would meet a minimum standard of benefits. The benefits had to at least match or be similar to the State Earnings-Related Pension Scheme the worker would have received. This is known as the Guaranteed Minimum Pension.
How to take your GMP
A Guaranteed Minimum Pension must be paid as an ‘annuity’. This means it will be paid to you as a fixed and guaranteed income for the rest of your life. This income is paid regardless of your objectives, circumstances and cannot be taken flexibly. The Guaranteed Minimum Pension part of a plan does not pay any tax free cash therefore, the full income is taxable.
As mentioned, the Guaranteed Minimum Pension becomes available at age 60 for females and 65 for males. These ages will remain the same and will not increase in line with the increases to the State Pension age or the minimum age you can take your pension benefits, which are due to increase in 2028 to age 57.
The Guaranteed Minimum Pension attached to a plan is calculated from the day you leave service with the particular employer which provided the benefit. The benefit is increased each year by a rate set by HMRC. Any GMP built up before 6th April 1988 will not increase in payment and any GMP build up after 5 April 1988 will be increased by 3% each year.
If you decide to retire before the specific scheme retirement date and start receiving your Guaranteed Minimum Pension benefit, the amount available to you will decrease by a certain percentage, dependent on how early you take it. On death, half of the Guaranteed Minimum Pension amount will be paid to your spouse or civil partner for a guaranteed number of years.
Can I transfer a plan which has a Guaranteed Minimum Pension benefit?
You can transfer any plan that contains a Guaranteed Minimum Pension to an alternative provider however this guaranteed benefit will be lost upon the transfer.