Dominic Brooks, Winterthur’s Pension Development Manager, examines the additional issues involved when a plan includes a Guaranteed Minimum Pension (GMP) element.
Client options
Our clients’ options are to leave the benefits where they are or move them to a replacement S32, or to a personal pension. The first problem lies in finding an alternative provider willing to accept the GMP liability as, though there may be one, I am not aware of any provider currently accepting new S32 business that includes GMP. So where does this leave clients? The choice is simple, stay where they are or transfer to a personal pension, lose the guaranteed element and have the tax free cash revert to 25%.
Key considerations – tax free cash
At first sight the option of transferring to a personal pension may appear unattractive – but would the S32 actually deliver what clients expected when they took out the plan?
- Why was a S32 selected over personal pension in the first instance? The reason was often because of the preferential tax free cash position. Before A-Day, on Defined Benefit (DB) transfers to S32, GMP was ring fenced and all non-GMP benefits were available to pay enhanced tax free cash.
- On the other hand, on transfer to a personal pension before A-Day, GMP became protected rights – but so did all post ‘97 DB benefits. As no tax free cash was available from protected rights, this left only the pre ‘97, non-GMP benefits against which tax free cash of 25% could be taken. Post A-Day whilst the rules relating to the S32 remain the same, the personal pension will now allow 25% tax free cash to be paid from the whole fund – including protected rights.
Key considerations – the GMP ‘guarantee’
But what about the ‘guarantee’ that would be given up? GMP involves an absolute guarantee to pay a certain level of benefits at state retirement age. Should there be insufficient funds in a plan, the provider will cover any shortfall. This is undoubtedly true but how will this work in practice? In most instances – but not always the case – GMP and non-GMP benefits are part of the same arrangement. It is only after both the non-GMP and GMP elements have been exhausted to cover the GMP liability that the provider themselves will cover any remaining shortfall.
Why is this point so important? Because tax free cash can only be paid once the GMP has been secured. Will there be any non- GMP benefits left? How much will be left?
The assumptions made many years ago regarding investment returns and the future for annuity rates have not materialised. As a result the funds allocated to cover GMP are generally short. Will the provider be covering this or is your client, unknowingly, effectively providing their own guarantee?
Editor’s Note: We are proud to have Winterthur as new sponsors of The Paraplanner for the rest of the year.
