Nimrod103 wrote:Can you run this past me again as I also have a Pre 88 GMP pension with 0% inflation increases from within the pension fund. Does that mean there will be inflation increases applied to my SP to compensate? I didn’t realise this and cannot say I ever noticed before whether this happened. Is it done automatically or do I have to remind the DWP of it?
The answer to the first question is yes, but you may not (yet) see it, and the answer to the second question is that HMRC keeps your GMP data and passes it to DWP when you are about to reach state pension age, and there's nothing for you to do, it's already in the mix.
Assuming you reached state pension age prior to 6-Apr-2016, here's an example of how it works. The GMP is supposed to (at least) replace the earnings related Additional State Pension you would have got had you not been contracted out. So, what happens is that DWP calculates how much ASP you'd have got if you hadn't been contracted out and then deducts the GMP you are receiving from that, and gives you the difference, if any.
There are two points of common confusion in this: firstly, when they do that they call that deduction the Contracted Out Deduction, but it's just a subtraction of your GMP amount. So actually £COD = £GMP. The second confusion is that when DWP talk (e.g. to you over the phone) about your ASP they are referring to it
after that deduction. To clarify that here I will refer to the ASP you'd have got if you hadn't been contracted out as
gross ASP and the amount after the COD (GMP) deduction as
net ASP.
Now, there are several ways a pension scheme can choose to revalue GMP
in deferment. One way is by national earnings, which is how the ASP is also revalued
in deferment. So, if your scheme chose that method, then when you reach SPA, e.g....
The gross ASP you'd have got if you hadn't been contracted out would have been, say, £100
The GMP you'll receive from the pension scheme would also be £100
So, in the first year: gross ASP - COD (GMP) is £100 - £100 = £0, so you'll receive no net ASP from DWP.
Then, in the second year, if there's 5% CPI inflation your gross ASP will be raised to £105, but your pre 88 GMP stays at £100, so gross ASP - COD (GMP) gives a net ASP of £105 - £100 = £5, and DWP will add a fiver to your pension payout. Etc etc in the following years. Gross ASP will continue to increase with CPI while your pre 88 GMP won't, and DWP will add the difference to your state pension payouts.
However, some pension schemes choose to revalue GMP
in deferment at a faster rate (there are a couple of prescribed methods), so it's possible to be in the situation where when you reach SPA, e.g....
The gross ASP you'd have got if you hadn't been contracted out would have been, say, £100
The GMP you'll receive from the pension scheme would be, say, £120
So, you can see that in the first year: gross ASP - COD (GMP) is £100 - £120 = - £20, which DWP floors at zero, so you'll receive no net ASP from DWP.
But if there is, say, 5% CPI inflation in each of the following years, it'll go like this:
Year 2, gross ASP - COD (GMP) is £105.00 - £120 = - £15, which DWP floors at zero, so you'll receive no net ASP from DWP.
Year 3, gross ASP - COD (GMP) is £110.25 - £120 = - £9.75, which DWP floors at zero, so you'll receive no net ASP from DWP.
Year 4, gross ASP - COD (GMP) is £115.76 - £120 = - £4.24, which DWP floors at zero, so you'll receive no net ASP from DWP.
Year 5, gross ASP - COD (GMP) is £121.55 - £120 = + £1.55 net ASP, which DWP will add to your pension payout
Etc
So, under that scheme you're not getting any inflation increases from DWP on your pre 88 GMP until year 5, but you're already getting, from year 1, more GMP than you would have got in ASP if you hadn't contracted out.
You'll have to ask your pension scheme about which method they use to revalue GMP in deferment and for the relevant figures for you, but hopefully the examples above have given you enough to understand how it works in relation to net ASP on your state pension.
