GMP No Cover

Video explains the issued faced by people with a S32 Buy Out pension where the transfer value does cover GMP and therefore there is no cash lump sum nor transfer to flexible drawdown pension.

Transcript:

“Hello there. The time of shooting this video is February 2015, we are literally just over a couple of months away from the new pension flexibility rules that start on 6 April. So you plan pensions flexibility and the reason I’m shooting this video is:

I must be getting, on average, one contact a day or one telephone call a day from people who’ve found us online and they have a section 32 buyout policy and they're quite annoyed and quite dismayed that they can't take advantage of the new pensions flexibility rules and the ability to draw down as much or as little of their pension fund as you want. A quarter of it is a tax free lump-sum and the balance taxable either draw down as a regular income or drawdowns lump sums but still taxable.

Now some people with section 32 buyouts are dismayed when they contact their pension company that's they can't do it. That they’re told: ‘there's not enough money in the pension to cover the GMP’.

So I thought I would do a quick video on that. Very, very quickly then: what is all this hassle about GMP?

So first things first: your section 32 buyout was probably a transfer from a company pension scheme that you used to be a member of, so many worked for a company, you were in the company pension scheme, you left and then your pension scheme, because you either decided to do it or the company pension scheme was wound up, your pension fund was transferred into a separate section 32 buyout policy.

Now going way back in time for your company pension scheme, some of you may remember the term Serps and contracting out of Serps and quite simplistically what that is:

Barbara Castle started this, it goes way back to an Act of Parliament in 1975, which then started Serps in 1978. Now Serps is the state earnings -related pension scheme and basically what that was, was when you pay National Insurance part of your national insurance pays for your main basic state pension, a first tier, your state pension but then some of your national insurance paid for a second-tier pension course Serps. So think of it a secondary state pension.

So, your national insurance pays for basic state pension but then it also paid for Serps which, Serps then later on changed its name and its rules slightly to the state second pension ‘S2 P’.

Now, what you were allowed to do and your company was allowed to do was you could ‘contract out of Serps’. ‘Contracting out’, do you remember that term? So by contracting out of Serps, not the main state pension but this secondary pension, your National Insurance that was going to pay that second ‘bit., you contracted out and your national insurance then went into your own company pension scheme. [And] what your company pension scheme had to do was promise, guarantee, guarantee to give you a pension that was at least equal to what Serps would have been if you would stayed in the state second scheme, the state earnings -related pension scheme.

Now, that was a promise made by the pension company to at least give you and here's what you may have read as well ‘a guaranteed minimum pension’ GMP. You’ve probably seen that if you’ve got a section 32 policy. So, you have this GMP which reflects what would have got from Serps, it's a guarantee, there are requirements to revalue your GMP pension and I don't know, let’s make it up:

Let's say you had a GMP, a guaranteed minimum pension entitlement of £1,000 per annum and then the rules, in terms of revaluing it, it may have been on a fixed revaluation basis where every year that £1,000 per annum pension entitlement may be required to increase at let's say 7.5% per annum, 8% per annum, 6.5%, depending upon when you left the scheme.

So you have this sort of little bit of second-tier state pension in your own company pension scheme and the government said it has to be revalued and it has to give you a spouse's benefit and then when you get to take the pension it has some form of inflation protection in there depending upon when payments were made some of them do some of them don't but then the state also agreed to top it up and make sure that it’s inflation protected as well, but I'm not going to go into that today.

But simplistically: national insurance for this second-tier pension went into your company pension this then a legal requirement to revalue it, probably on a fixed rate fixed rate revaluation basis and then inflation protection of some sort when you come to take it (as income).

Now, the problem with that is: you then transferred your company pension to a section 32 buyout policy and when that transfer was made the new pension company, the section 32 company, they again had to take on that guarantee, that promise. So they’ve take on the promise to provide you with GMP, a guaranteed minimum pension.

So let us say you have a pension entitlement of £1,000 a year, okay? £1,000 a year pension. To buy that pension on the open market with inflation protection and everything else and all those things, annuity rates are [approximately] 2.5%. So the reality is if I do some numbers for you and say: right £1,000 a year pension with providing all of those things that you would want on the open market, and I’m only giving you approximate figures here, but £1,000 pa, that would cost you in real monetary terms today: you would need to have a pension fund worth £40,000.

Now let’s say this little pension of £1,000 GMP, let's say the real value at the moment is the transfer values only grown to £15,000 or £20,000 or something like that, because it's quite a small pension, so you transferred the pension in it might be worth 1,2, 3 5000 as a transfer value, it's then grown over the years to £5,10, £15, £20, £30,000 BUT the cost to buy a GMP, a guaranteed minimum pension on today's open market would be about £40,000 for those figures that I have given you.

So if your transfer value is lower than the GMP projected element cost then they will say: “there is not enough money to cover the GMP” and if there is: the transfer value’s £30,000 BUT the intrinsic value of your pension, it would cost on the open market, £40,000 let's say based upon those numbers, there’s not enough money to cover the GMP so you can't then transfer your section 32 policy to a personal pension and then release a tax-free lump sum and then release other draw down funds under flexible drawdown.

So it is a little bit of a quandary and you know people are quite shocked to find this out but it's a complex subject, but I just wanted to touch on: there are problems for people who have section 32 buyout policies, who then want to take advantage of the new pensions flexibility laws and if you get a response from your pension company which says: “there’s not enough money to cover the GMP”, I've just explained what that is.

If there is enough money to cover the GMP, no problem let's say: the GMP was £1,000 per annum pension but in real monetary terms valued you would have to pay about £40,000 to get it, and if the transfer value was £50, £60, £70,000 no problem.

But it's these ones where the fund performance hasn’t grown as quickly as anticipated, the pension company themselves are left ‘lumbered’ with a pension scheme that there isn’t enough money in but they’ve still got to guarantee to give you this income but you're left with no flexibility.

[But] it is one of the most complex subjects that I deal when we’re dealing with private pensions and all was I would suggest is: click on the contact form, book a callback using my online calendar and I’ll happily talk you through your pension benefits and what you can and can't do. So that's the subject: problems with section 32 buyout policies and trying to access either a tax-free cash lump sum or drawdown or both when the new pension flexibility laws start. Thanks very much for watching.”