What is guaranteed minimum pension?

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Guaranteed minimum pension (GMP) is a defined benefit. This means it is a specific amount of pension and is payable at 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.

There are three key parts of a retirement fund for a policy with GMP:

  1. Non reserved funds – these are built up from contributions made by you or your employer to your original pension scheme.
  2. Reserved funds – these are put aside to cover the cost of providing the GMP on the start date of the policy. The GMP is the minimum pension which needs to be provided because the scheme you were previously a member of had been contracted out of the State Earnings Related Pension Scheme (SERPS). The minimum pension requirement continued when your benefits were transferred to your current policy with us.
  3. Reference scheme test (RST) funds – these relate to benefits (excluding additional voluntary contributions) built up after 5 April 1997 under a previous contracted out occupational scheme you were a member of. These funds continued to be kept separate when your benefits were transferred to your current policy with us. Regulations governing the payment of the RST specify the basis on which the pension must be paid.

These will be shown separately on your statement of benefits.

There are regulations that govern the payment of your GMP and how the pension must be paid. These are:

  • The GMP must be paid as an annuity.
  • The GMP is calculated at the date you leave service and is increased each year at a rate set by HMRC up to your 60/65 birthday. This is called the revalued GMP.
  • Tax free cash isn’t available from GMP funds.
  • GMP built up before 6 April 1988 won’t increase each year in payment.
  • GMP built up after 5 April 1988 (post 88 GMP) will increase by 3% each year in payment. The first increase will be on 6 April following the date the GMP becomes payable, with subsequent increases being made on 6 April each year.
  • Where the post 88 GMP is payable after age 60/65 it will increase at the lower of 3% or the Retail Price Index (RPI) each year. The first increase will be on 6 April following the date on which the GMP becomes payable, with subsequent increases being made on 6 April each year.
  • GMP must be available from age 60 for females and 65 for males irrespective of changes in the state pension age.
  • One half of the GMP is payable as a spouse, same sex or civil partner’s pension on your death. For female policyholders, the pension payable on death, only applies to the GMP earned after 5 April 1988.
  • Where the GMP is payable early, the post 88 GMP is decreased by 3% each year from 6 April to the selected early retirement date. This makes sure that at age 60/65 the correct GMP is payable.
  • Where the GMP is payable after age 60/65 this will be increased by 1% for every seven weeks passed age 60/65.
  • Where the GMP is payable after age 60/65 and after the next tax year end, the post 88 GMP must be inflation proofed by the lower of 3% or RPI.

Any increase and/or inflation proofing for GMP payable will be calculated by Legal & General and included in the annuity quote you request.

If you’re not married, any spouse’s pension will be calculated on a future spouse basis.

The spouse’s pension will be payable in the event of your death.

If your policy was set up before 1 August 1990 (sometimes referred to as pre August 90) your GMP can’t be paid before the age of 60 for females and 65 for males. The GMP benefit, payable from the reserved fund, will remain in the policy until age 60 for females and 65 for males.

If the cost of the GMP benefit is less than the reserved fund, the excess fund will be treated as non reserved units to provide additional benefits.

Any shortfall in providing the GMP at age 60 for females and 65 for males will be paid by Aegon if you buy an annuity from our arrangement with Legal & General.

If your policy was set up after 1 August 1990 and before 4 November 1996 (sometimes referred to as the mid regime) your GMP can’t be paid before the age of 60 for females and 65 for males unless there are sufficient funds in the reserved funds to cover the cost of the GMP.

The reserved funds will remain in the policy until age 60 for females and 65 for males, or until such time as there are sufficient funds in the reserved units to cover the cost of the GMP.

If the cost of the GMP benefit is less than the reserved funds the excess fund will be treated as non reserved units to provide additional benefits.

Any shortfall in providing the GMP at age 60 for females and 65 for males will be paid by Aegon if you buy an annuity from our arrangement with Legal & General.

If your policy was set up on or after 4 November 1996 (sometimes referred to as post 96) your GMP can’t be paid before the age of 60 for females and 65 for males unless there are sufficient funds in the policy to cover the cost of the GMP.

The funds will remain in the policy until age 60 for females and 65 for males, or until such time as there are sufficient funds in the policy to cover the cost of the GMP.

If the policy commenced after 3 November 1996, the policy conditions state that any shortfall in providing the GMP must be met by the reference scheme test and non reserved funds. Any excess in these funds can then be used to provide additional benefits.

Any shortfall in providing the GMP at age 60 for females and 65 for males will be paid by Aegon if you buy an annuity from our arrangement with Legal & General.

If you’d like to set up the GMP annuity please contact our annuity provider Legal & General to discuss your pension options. Please refer to the ‘Make it Happen’ page on your quote for contact details.

Yes, you can. Any fund paid as an open market option from your policy must be used for a compulsory purchase annuity with the receiving insurer. If you decide to buy your pension from another annuity provider, the open market option must provide at least the same level of pension benefits as currently payable from your policy. That is, it must be the same or more than the amount and level of GMP which is confirmed in your retirement quote.

Your GMP may be paid as a trivial commutation lump sum. HMRC sets out the strict conditions on when a trivial commutation lump sum can be offered. The conditions are:

  • You must have reached age 55, your protected pension age (if you have one) or meet the ill health condition.
  • The payment must extinguish all the defined benefits under the scheme making payment.
  • The total value of all pension benefits from all registered pension schemes, including benefits already taken (but excluding any trivial lump sums taken before 6 April 2006) must be £30,000 or less on the nominated date.
  • All trivial commutation payments must be paid within a 12 month window.
  • The policyholder must not have been paid a trivial commutation lump sum previously (excluding any pre 6 April 2006 trivial lump sums and any earlier trivial commutation lump sum payments within the 12 month period).
  • There must be available lifetime allowance to pay the lump sum.

In addition to these conditions, there are tests that are set out by the scheme actuary:

  • That 20 times the revalued GMP will be £30,000 or less.
  • The cost of providing the GMP as an annuity must be £30,000 or less and there must be enough money in the relevant fund(s) to secure this.

Assuming that these criteria are met, you may take a trivial commutation lump sum where 25% of the fund is payable tax free and the remainder is subject to the basic rate of income tax.

Payment of a trivial commutation lump sum isn’t a benefit crystallisation event.