Can you move a Guaranteed minimum pension (GMP) into income drawdown. The short answer is yes, but regulation stipulated only through a suitable qualified financial adviser. GMP benefits are a valuable guaranteed lifetime income, which are mostly inflation proofed, meaning the value of the income will go up each year. If you are thinking of forfeiting these benefits to take advantage of the flexibility offered through pension drawdown, there are extra considerations you should fully understand before a transfer is instructed.
For people who hold GMP benefits within their pension scheme, the choices, should you stay within the scheme are somewhat limited. You can’t choose any options within the GMP benefits such as extra guaranteed years or a different escalation rate to the income, as you can with an annuity. Additionally, these benefits don’t take into consideration your state of health when buying a lifetime income.
Through my experience in dealing with GMP benefits, I have often helped
- Secure a higher lifetime income,
- help transfer these benefits into income drawdown,
- allowed the client to take benefits before the GMP intended retirement age and
- released more tax free cash that was being offered through the scheme originally.
The rules around GMP benefit are very strict, but there are alternatives and depending on what you want from your pension monies, there is often a route which may suit your circumstances better. Through the advice that I provide, I’ll listen to what you’re looking for and suggest the most suitable route. If the GMP benefits are the most advantageous after assessing your needs, my advice will be to stay exactly where you are.
Moving GMP benefits into Drawdown
As the new pension reforms provide much more flexibility and access to pension savings, I have help many people free up their GMP benefits and move into income drawdown. This often allows the client to take more tax free cash that was being offered through their GMP scheme and then allow full access to the rest of their benefits.
What is GMP
GMP benefits were accrued as part of contracting out national insurance contributions pre 1997. So rather that accruing additional benefits into SERPS (state second pension), there was a period of time where people were allow to try and build a better income that the state could have provided.
If your benefits were contacted out through a defined benefit scheme, regulations stipulated that the scheme had to provide a Guaranteed Minimum Pension. This essentially tried to put some fairness into the practice so that you were guaranteed not to receive an income at state pension age which was any less that someone who had stayed contacted into SERPS.
The rules which were created around the time were reflective of the high interest rates and have therefore created quite valuable benefits from often very little contributions. Once leaving the scheme, the rules promised that the benefits should be re-valued at a guaranteed percentage according the year. These are as follows.
1978 to 1988 – 8.50%
1988 to 1993 – 7.50%
1993 to 1997 – 7.00%
1997 to 2002 – 6.25%
2002 to 2007 – 4.50%
2007 to 2012 – 4.00%
Obviously having a guaranteed re-valuation rate of 8.5% is far over and above how interest rates, inflation or even investment growth have consistently performed at. Those with benefits re-valuing at this rate have therefore done extremely well out of their contracted out contributions when compared to other pension savings.
As an example take someone who had £1,000 of GMP income when they left the scheme in 1988. The compound rate of 8.5% per year would mean that if they reached normal retirement age in 2016, the £1,000 would equate to an annual income of £10,652.
As stated earlier, the holding scheme has to pay the income at this level. It is essentially a contract with HMRC which they have to fulfill. There is a monetary cost to the scheme to pay this income and at current market rates, this would cost the scheme over £200,000, which is essentially a potential transfer value.
Now, the rules around transferring benefits out of GMP schemes are very strict and it’s often not possible to move benefits, but in the right circumstances it can be done.
It’s important to state again though that GMP benefits are fantastic in the right circumstances. From small initially contributions, as in the example above, huge guaranteed benefits can be accrued. If guaranteed lifetime income is important, you won’t find a better pension. If however, access to benefits flexibly is more important, or you have medical history and want to look at alternative options, a transfer may be worth investigating.