GMPs

This depends on when you reach state pension age. Those who have reached state pension age by 5 April 2016 will receive a state pension (if they qualify for state pension) under the old system. Those who reach state pension age after that date will receive a state pension under the new system.

The new system will therefore apply to:

• Men born on or after 6 April 1951 and
• Women born on or after 6 April 1953.

You will have needed to pay a certain level of national insurance contributions or have national insurance credit to be eligible under either system. For more information on eligibility for state pension, go to www.gov.uk/new-state-pension.

Your entitlement under the new single state pension will be calculated in two ways in order to arrive at a “Starting Amount”:

• First, the Government will calculate what you would get from the old system if you reached state pension age on 6 April 2016; and
• Second, the Government will calculate what you would get from the new system if you reached state pension age on 6 April 2016, with special deductions for contracting out called a “rebate derived deduction” or “rebate derived amount”. (See below for an explanation of contracting out and rebate derived deduction and amount.)

The higher of these two amounts is your “starting amount” or “foundation amount”.

If your starting amount is less than the highest state pension under the new system (£155.65 per week in 2016) then you can add to your state pension each year under the rules of the new system until it reaches the full rate.

If your starting amount is higher than the full rate of state pension under the new system (£155.65 per week in 2016), then you will receive this higher amount. However, you will not receive any credit for additional NICs paid after 6 April 2016.

The part of your starting amount that is higher than £155.65 is called your “protected payment”. Inflation protection will work differently for the part above and the part under £155.65 at 6 April 2016.

• Up to the full rate will be increased up to an amount determined by Parliament. Right now, it is increased by the “triple lock”, that is it will rise by the higher of the increase in earnings, increases in prices or 2.5%.
• The amount that is your protected payment will rise by price inflation, measured by the consumer price index or CPI.

The increase in earnings and the increase in prices are determined in accordance with government-prepared indices.

If your employer offered a private pension scheme, they could arrange to “contract” you out of the additional state pension. Both you and your employer paid lower NICs as a result.

Under the old system, you were still eligible for basic state pension and any graduated retirement benefit that you had earned, but you received a lower additional state pension.

• For service 6 April 1978 - 5 April 1997, you received less additional state pension than you would have received and
• For service 6 April 1997 – 5 April 2016, you would receive no additional state pension, with some exceptions for service after 2002.

• From 6 April 1978 to 5 April 2002 it was called SERPS, which stands for State Earnings Related Pension Scheme. It is financed by national insurance contributions.
• From 6 April 2002 to 5 April 2016 it was called state second pension or S2P. It is more generous for those with low and moderate earnings than SERPS was, covering some carers and people with long term illness or disability.

Additional state pension has been abolished for those reaching state pension age on or after 6 April 2016, when the state pension entitlement moves to the single state pension.

The GMP must be of roughly the same value as the additional state pension that you would have earned. However, it is paid through the private pension scheme that your employer set up instead of through the Government.

The GMP is paid as part of the private pension, and normally you will not notice it as a separate pension at all. You have been promised a certain level of pension overall, and the GMP sits underneath that promise. However, your pension scheme may separately show you your GMP on an annual statement when it is in payment.

Sometimes the only private pension you have will be GMP. However, usually, your private pension promise is for more than the GMP, based on different rules than the GMP.

Because of the way the rules for GMP work, even when your scheme provides a higher benefit overall than the GMP, the GMP must be accounted for separately from the rest of your private pension. It will be a little different from the rest of your private pension. For example, rises in value on account of inflation will work differently for your GMP than for the rest of your pension. Your GMP may pay a different spouse’s pension from the one that comes from your private pension.

Under the reference scheme test, you must get a pension at least broadly equivalent to 1/80th of band earnings with a spouse’s pension of 50% on your death. Band earnings are earnings on which national insurance contributions are paid.

However, there is no separate pension within your private pension, in contrast to GMPs.

• If you reach state pension age after 6 April 2016, the Government will calculate your pension under the new system: First, by calculating what you would get if you had been in the new system over your working life thus far; and
• Then it subtracts an amount that it calculates is your “rebate derived deduction”.

The rebate derived deduction is, basically, the amount of additional pension to which you would have been entitled if you had not been contracted out. It consists of two parts:

• The Contracted Out Deduction (“COD”), which applies only to GMPs and is specific to the way your GMPs work. It should take into account which kind of inflation protection your employer chose for GMP if you stopped working before GMP pension age*; and
• An additional deduction for your contracted out service after 1997 (if any) that is broadly the value of the additional state pension that you are not entitled to because you were contracted out.

To find your rebate derived deduction, look on your pension statement for the Contracted Out Pension Equivalent or “COPE”, which is basically the same as the rebate derived deduction. The COPE is described in the literature as the value that you should be getting from your private pension scheme. This is true for GMPs, the part that is the COD, but is not accurate for the rest of the deduction. The value that you will in fact get from your private scheme will depend on what form your contracted out benefits take (money purchase or salary related for example) and many other things. See “Why doesn’t my private scheme guarantee that it will give me my COPE?” below.

* GMP pension age is age 60 for women and age 65 for men. See “Why are GMPs unequal?” below.

The COPE is actually just the amount that has been deducted from your state pension. The Government tried to make sure that your private scheme provided a benefit at least as valuable as the additional pension, but it was not the exact same benefit.

Your GMP will be about the same as the COPE for benefits earned before 1997. If you are in a defined benefit scheme, the benefit you earned in your scheme after 1997 is likely to be more valuable than the COPE. However, if your private scheme is a defined contribution scheme and you contracted out on a “protected rights” basis, then your benefits will depend on the investment performance of the contributions made, and may be more or less than the COPE.

Prior to April 2016, the state pension that you could earn consisted of:

• Basic state pension plus
• Graduated retirement benefit (based on service between 1961 and 1974) plus
• Additional state pension earned before 6 April 1997, minus the value of your GMP, if any, plus
• Additional state pension earned between 6 April 1997 and 5 April 2016 during any time that you were not contracted out, plus
• Additional state pension credits available to low earners from 6 April 2002, if any.

The deductions from your SERPS and State Second Pension at steps 3 and 4 is what the Government also calls your “COPE”. The Government calls it your COPE because it reckons that your private pension will give you a similar amount to the amount that it has deducted.

Your additional state pension was calculated as normal for the periods that you were earning GMP, but then the Government subtracted the amount that it calculates your GMP is worth as a “contracted out deduction”.

Your GMP is worth roughly the same amount as your additional state pension would be worth. However, the inflation protection on your GMP is different from the inflation protection that would have applied to the state pension. Because of this, over time the value of your GMP can be different from the value of the additional state pension. Often the GMP is of a higher value than the additional state pension you would have earned.

Additional state pension rises before it is put into payment in line with national average earnings. However, if you left work before GMP pension age, your employer may have chosen a different method to protect against inflation. If your employer chose to protect your GMPs:

• at a fixed rate, your GMP rose at a rate set by Parliament each 5 years; or
• at a limited rate, your GMP rose at a rate capped at 5%. (This would only be available if you left work before 1997.)

Your employer could also have chosen to raise your GMP each year in accordance with national earnings, in which case it would revalue at the same rate as the additional state pension.

So the value of the GMP that was subtracted from your additional state pension depended on:

• whether you stayed in the scheme until GMP pension age,
• when you earned your GMP, and
• If you did not stay in the scheme until your reached GMP age, what kind of inflation protection your employer chose.

HMRC may hold a different record for you than your scheme holds. This is because records may have become confused when or after they were reported to HMRC. For example, HMRC may have recorded your social security number or employer identification number wrongly. Errors could have occurred at either HMRC or your scheme when paper records were transcribed onto computer records. HMRC may not have recorded a contributions equivalent premium correctly.

HMRC has encouraged the trustees of your scheme to make sure that their records and HMRC’s records agree so that you can get the right amount of GMP and state pension. This is called “reconciliation”. Most large schemes are reconciling their records to HMRC’s records now. However, the process is very slow and the amount that the HMRC or the scheme, or both, show for your GMP may be changed once the records are reconciled.

You can ask for a State Pension Statement. This statement will tell you when the Government believes you were contracted out and the amount of state pension it believes you are entitled to as a result. For information on how to get a state pension statement, go to www.gov.uk/state-pension-statement.

This amount that the statement shows may change, however. This could be because:

• If you ask for the pension statement in 2015 or 2016, all of the credit for work up to 6 April 2016 may not yet have been recorded
• Your private scheme has not reported how it is going to inflation protect your GMP once contracting out ends (and so the Government’s estimated COPE amount is incorrect); or
• HMRC and your scheme reconcile your record and conclude that you were contracted out for a different period than HMRC records now show or there was some mistake in the calculation.

We call the way that pensions rise to account for inflation “inflation protection”. Inflation protection works differently depending on whether you are working, whether you have reached GMP pension age, and whether your GMP has been put into payment.

While you are working for the same employer that contracted you out, each prior year’s GMP rises in line with national earnings until you reach GMP pension age.

When you are no longer working for that employer or if the employer stopped contracting out for reasons other than the end of contracting out, your employer can choose how to raise your GMP in line with inflation. Depending on your employer’s choice, your GMP may rise before it is put into payment

• at a fixed rate determined every five years by Parliament based on assumptions about earnings growth;
• in line with national average earnings each year; or
• If you left contracted out service before 1997, it may rise in line with national average earnings, capped at 5%.

Many employers chose to raise the value of the GMP at a fixed rate. This means that if you left the active membership in the scheme at a time of high inflation, your GMP could be rising in value each year by as much as 8.5%.

The rate at which your GMP or other pension benefit rises before you put it into payment is called “revaluation”. Your additional state pension would have revalued in line with national average earnings.

Once you put your GMP into payment:

• GMP earned before 6 April 1988 does not rise when in payment
• GMP earned after 5 April 1988 will rise in line with the lesser of 3% or price inflation.

Your additional state pension would have risen in line with prices until 2011 and after that in line with national earnings.

If you have not put your private pension into payment by GMP pension age, special provisions regarding its value apply.

Yes. If you left your scheme a long time before you reached GMP pension age, and your employer used fixed rate revaluation, your GMP could start out being worth more than your additional state pension. If that happened, you would only get your basic state pension under the old system, at least at first.

Under the old system, the difference between the value of the GMPs and the value of your state pension is calculated each year. Once you put your GMPs in payment, if some of your GMPs were from before 1988, your additional state pension would grow faster than your GMPs. When your additional state pension grows larger than the value of your GMPs, that part of the state pension that is higher than your GMPs is paid to you as state pension.

This has to do with the way that the value of the GMP was subtracted from the additional state pension entitlement under the old system. See “Could my GMPs ever be more than my additional state pension?” Once your state pension was being paid, GMP earned before 1988 did not rise at the same rate as the state pension. If you were over state pension age and your pension was in payment, your GMP earned before 1988 did not rise at all. The state pension eventually became more valuable as it rose in accord with the Government’s price index. You were paid the difference between what the state pension would have paid and what your GMP was paying through the state pension system.

This has to do with the ways that inflation protection works differently for GMP and for state pension. See “Could my GMPs ever be worth more than my state pension?” The value of your GMP on 6 April 2016 could be higher than the value of your additional state pension at 5 April 2016, or only a little bit lower. This could happen if the way your scheme protects your GMP for inflation is more generous than the way the additional state pension is protected.

Under the old system, GMP value was subtracted from additional state pension value each year. The difference between what your additional state pension was worth and what your GMP was worth would grow in time because your pre-1988 GMPs would not be growing at all, but your state pension would be. Even if you received no rises at the beginning of your retirement because your GMP was worth more than the additional state pension, you might have received some additional state pension over time.

Under the new system, the value of all of your GMPs is compared to the value of the additional state pension just once – as of 5 April 2016. If your GMP is worth less than your additional state pension at that time, the difference between them is added to your starting amount under the new system. But your additional state pension no longer exists and so it will not grow separately over time.

However, all of your new state pension will rise in payment in accordance with the triple lock, for so long as that is in place. The triple lock is a promise from the Government that your state pension will rise by the higher of the increase in earnings, increases in prices or 2.5%. This promise is currently to be in place until the end of Parliament in 2020.

A money purchase scheme is one in which there is no promise about the amount of income that you will receive in retirement from your pension benefit. In a money purchase scheme, your contributions are invested, and you will be entitled to what can be purchased with that “pot” at retirement.

Usually, if you were contracted out in a money purchase scheme, your employer made an extra contribution into the scheme. The amount of the contribution was broadly based on the value of the NICs that you and your employer were not paying, although the method of determining these so-called rebates changed somewhat as of 6 April 2002. What you received and how it was paid depended on whether you were in a personal pension scheme or an occupational pension scheme.

You will receive no additional state pension for the time you were contracted from 6 April 1997 until 5 April 2002. From 6 April 2002, depending on how much you earned and what kind of scheme you were in, you may be entitled to some additional state pension.

The benefits traceable to the extra contributions made due to contracting out were called “protected rights,” and were subject to certain rules until 6 April 2012. Your scheme no longer has to treat those contributions separately from the other benefits in your scheme.

It would be possible for you to have earned GMPs even if your private pension is a money purchase benefit. In that case, your GMPs would form an “underpin” to your money purchase benefit. The GMPs will need to be paid out as a pension unless your money purchase benefits can purchase a more valuable annuity than the GMP. After 6 April 1997, your scheme could have continued to contract out, and provided a similar underpin based on the reference scheme test.

If you were contracted out, but were in the pension scheme for less than two years, you were probably given a lump sum rather than remaining a deferred member of your pension scheme. This might have happened because you left your employment with the employer who sponsored the scheme.

If you ended employment Between 6 April 1975 and 6 April 1987, you probably would have gotten a lump sum if you were a member for less than 5 years. (Before 6 April 1975, you and your employer did not pay the full amount of national insurance contributions while you were in the scheme. If you left service and did not remain a member of the scheme, your employer paid back those unpaid national insurance contributions as a “contributions equivalent premium”. HMRC should have a record that this premium was paid, and give you credit for additional state pension during your period of employment.

If you do not have any GMP, but HMRC shows that you were contracted out, it may be that HMRC has not recorded the contributions equivalent premium correctly. Your scheme may also have made an error. If this is the case, that error should be corrected in reconciliation.

You cannot put your GMP into payment before GMP pension age. If you put your private pension into payment before GMP pension age, your income will be based on your private pension only. Some of that private pension will be paid as GMP once you reach GMP pension age. You will probably not notice any difference, because the GMP is only slightly different from your private pension, based on the inflation protection that you get from it.

GMPs are different for men and women. GMP is payable to women from age 60, but men must wait until age 65. This is because these were the state pension ages at the time the GMPs were earned. A woman’s GMP earned in a given year is more valuable than a man’s GMP because she will be entitled to draw it earlier and therefore longer (assuming they both live the same amount of time). However, women did not have an opportunity to earn GMPs after age 60 and men did.

Also, the rate at which the value of your GMP rises to take account of inflation depends on:

• the date on which you end employment;
• the date on which you end earning GMPs;
• whether you are under or over GMP age; and
• When you draw your pension.

So between the ages of 60 and 65, the GMPs of a woman and a man of the same age with the same work history could rise at different rates. (See below, “How does inflation protection for GMPs work?”)

In addition, spouse’s pensions on death are not equal. A widow’s pension is available on a husband’s GMPs earned from 1978, but a widower’s pension is only available on a wife’s GMPs earned after 1988. (In cases of same sex marriage or civil partnership, the benefits of the spouse or civil partner of a member are treated as though they are widower’s benefit.)

If there are two people, a man and a woman, with the exact same birth day, work history and salary, it is often difficult to tell who has a better GMP. Usually, the woman will start out getting more, because she can put it into payment sooner. But the man’s GMP may become more valuable over time.

Where the GMP does not apply, the normal rules of the pension scheme apply. Sometimes, the pension would rise in the private scheme in a way that is better for the member than the GMP. In that case, it may be better overall to have a smaller GMP because it is better to have the private pension instead. This makes it very difficult to tell who the overall “winners” and “losers” are.

No. All contracting out stopped on 6 April 2016.

If you have worked for a long time under the old system, you may already be eligible for the full rate of the new state pension (£155.65 in 2016), or even a higher amount. (See above, “I have paid NICs before 6 April 2016 but will reach state pension age after that date…”) As explained earlier, however, you will get less from your state pension if you were contracted out. (See “How does the Government calculate my state pension under the new system if I was contracted out?”

If all of your service is under the new system, you will need to work and pay national insurance contributions for 35 years in order to get the full state pension. If you work and pay NICs between 10 and 35 years, you will get a pro-rata amount of state pension.

You may be eligible for national insurance credits for time that you were not in paid employment, especially if you were a carer. For more information, go to www.gov.uk/national-insurance-credits/eligibility. You may also be able to pay voluntary national insurance contributions to top up your state pension. For more information go to www.gov.uk/volunatry-national-insurance-contributions.

In order to qualify for a state pension under the new system, you must:

• Reach state pension age after 6 April 2016 and
• Work for at least 10 qualifying years.

If you worked abroad or have been a carer then that time may count toward qualifying years. The years do not need to be consecutive and can be from either before or after 6 April 2016.

If you are due no or very little state pension, you may be eligible for a pension credit. For more information, go to www.gov.uk/pension-credit.

For more on eligibility under the new system, see www.gov.uk/new-state-pension.

As a general matter, each person will receive his or her state pension based on their own NI record if they reach state pension age on or after 6 April 2016. In most cases, there will be no entitlement to a state pension based on a spouse or civil partner’s national insurance contributions, and no provision for “inheriting” some of your spouse’s or civil partner’s additional state pension on death as there is under the old system.

If you are entitled to inherit some of your spouse or partner’s additional state pension under the old rules as of 5 April 2016, you may be able to do so under some “grandfathering” provisions. However, these will not apply to national insurance contributions after 6 April 2016.

If you have paid married woman’s reduced-rate national insurance contributions, there are special rules that will apply.

You may also be entitled to credits for time spent in unpaid caring work, including care for children.

For more on spouses’ benefits and how they are changing go to: www.gov.uk/new-state-pension/inheriting-or-increasing-state-pension-from-a-spouse-or-civil-partner and www.gov.uk/state-pension-through-partner.