What is a guaranteed minimum pensions (GMP)?

You will have a guaranteed minimum pension (GMP) when you 'contract out'. Contracting out refers to opting out of the State Earnings-Related Pension Scheme (SERPS), an additional state pension paid in addition to your basic state pension. 

You could only contract out of the additional state pension if your employer ran a contracted-out pension scheme.

When you contract out, you would pay a lower amount of national insurance contributions and instead pay those monies into your workplace, occupational personal or stakeholder pension.

For those employed in the public sector, members were automatically contracted out of SERPS into a GMP.

Suppose you were a member of a defined benefit public sector pension scheme between 1978 and 1997; you will have a GMP.

The GMP represents an income equivalent to that of those who didn't contract out. Your fund may have an investment component that runs alongside the promised guaranteed income, but whether there is sufficient funding in this component to cover the Guaranteed Minimum Pension (GMP) is not entirely relevant. 

Schemes that took on board the contributions are responsible for meeting the guaranteed income requirement. Therefore ensuring you were not disadvantaged by contracting out of SERPS.

Why do I have a GMP pension?

Members of defined benefit pension schemes between 1978 and 1997 were automatically contracted out of the State Earnings-Related Pension Scheme (SERPS). 

The government guaranteed a minimum pension, to ensure that individuals who were automatically contracted out of SERPS didn’t receive less in benefits than they would have under SERPS. It’s important to note that the GMP applies specifically to members of pension schemes that were contracted out on their behalf. If someone contracts out of SERPS through a defined contribution workplace or personal pension, they are not entitled to the Guaranteed Minimum Pension (GMP).

How much GMP do you get?

GMP is determined based on what you would have received if you had been in SERPS.

It is not an extra amount to be paid, but a guaranteed minimum, and is usually more than if they had stayed in the second state pension scheme.

State Pension Reforms 1978 to 1997

The state retirement pension structure underwent changes starting in 1978. The pension consisted of two main components:

Basic pension: Often referred to as the 'old age pension', this was based on the member's national insurance contributions record. The Department of Work and Pensions (DWP) was responsible for paying this component.

SERPS was an additional state pension based on a member's national insurance contributions. Public service pension schemes, during this period, were automatically contracted out of this scheme and therefore contributed at a lower rate of national insurance.

State pension reforms from 2016

State pension: The era of contracted-out employment concluded in April 2016, and the single-tier state pension scheme replaced it. This change marked a shift in the pension landscape, affecting how pensions were structured and managed.

At what age will I receive my GMP?

The specific ages for GMP pension eligibility are 60 for women and 65 for men.

Can I take a lump sum?

No. Tax-free cash can be paid from GMP rights only if the member has a serious illness or is terminally ill.

Only a complete transfer would unlock the ability to release access to the entire 25% tax-free cash element.

However, as long as the GMP liability is met, if GMP rights are taken alongside other benefits from the same scheme, the member's tax-free cash entitlement can be calculated based on the remaining benefits.

For example:

Fund size £100,000

Guaranteed minimum pension of £90,000

Accessibility to tax-free cash £10,000

 

Can I transfer my GMP?

GMP rights can be transferred to any other pension scheme, such as:

• Personal pension scheme
• Occupational money purchase scheme
• A contracted-in or contracted out salary related scheme
• A qualifying recognised overseas pension scheme (QROPS)

 

However, it may not be the best course of action to take, as you lose a potential loss of guaranteed income. All GMP transfers will require financial advice.

Note: Unfunded public sector schemes cannot be transferred to flexible pension arrangements. 

Can I transfer a small GMP?

Yes, small pensions containing GMP can be paid out as a lump sum under what is commonly known as the 'small pot rules', provided the value doesn't exceed £10,000 and certain other conditions are met. 

What are the death benefits?

If a member is married or in a civil partnership, when they die:

A surviving widow typically receives a pension of 50% of the member's Guaranteed Minimum Pension (GMP), provided it was built up after 5 April 1988.

Note: Do keep in mind that any GMP built up before 6 April 1988 is not accessible to any widower's or civil partner's pension.

How is my GMP calculated?

If you need information on how your GMP is calculated, you can contact HMRC (His Majesty's Revenue and Customs). 

Get expert advice

If you’re unsure how your GMP impacts your retirement income or whether transferring is the right move, speaking to a qualified financial adviser can make a real difference.

Let Regulated Advice match you with a financial advisor for expert advice.