What is a Guaranteed Minimum Pension (GMP) and how does it affect my pension?

Full answer

The Guaranteed Minimum Pension is a feature of older defined-benefit (final-salary) occupational pensions. Between 6 April 1978 and 5 April 1997, schemes could contract out of the State Earnings-Related Pension Scheme (SERPS). In exchange for paying lower National Insurance, both the member and employer gave up part of the additional state pension, and the scheme promised to pay at least a guaranteed minimum in its place. That promised floor is the GMP. It affects anyone who was a member of a contracted-out salary-related scheme during that period - typically people now at or approaching retirement. Several quirks flow from GMP. It is calculated separately for service before and after 6 April 1988, and the indexation rules differ: the scheme must increase post-1988 GMP in payment up to a capped level, while pre-1988 GMP increases are handled through the state system. GMP also has its own reference ages of 60 for women and 65 for men, which is the source of the long-running GMP equalisation exercise: because the underlying state benefit treated the sexes differently, schemes have had to recalculate and top up benefits to remove the resulting inequality. This can produce small back-payments and ongoing adjustments. In practice your scheme administrator does these calculations; you do not work out your own GMP. What matters to you is that part of your defined-benefit pension is ring-fenced as a guaranteed minimum with distinct increase rules, which can affect how much your total pension rises each year. The amounts are scheme-specific and not set by any standard rate, so ask your administrator for your GMP figure. To see how your overall pension income sits against tax and the personal allowance, use a pension or income tax calculator.

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