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Additional SP query

XFool
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Additional SP query

#211887

Postby XFool » April 1st, 2019, 8:08 pm

Just a quick question.

On the DWP State Pension notice for my old style state pension I realise I don't understand one thing. The line about Additional State Pension is always:

'Pre 97 additional State Pension'

What exactly is with this Pre 97? Surely SERPS was running until 2002? I stopped paying NI from the end of September 1998 (is this it?). It's possible I once understood this, but if I ever did, I've forgotten it now!

Thanks for any help explaining this.

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Re: Additional SP query

#211902

Postby XFool » April 1st, 2019, 10:43 pm

Ah... I think I get it. I think I did at some point understand but had forgotten.

From Wikipedia:

"With effect from 6 April 1997, Guaranteed Minimum Pensions no longer accrued and the system was replaced by the Reference Scheme Test."

https://en.wikipedia.org/wiki/Guarantee ... um_Pension

As this line in the SP statement is solely to do with increases in the GMP (I was contracted out) paid via the state pension so, from the date the GMP was replaced by the Reference Scheme Test for contracted out work pensions, it had no further relevance.

Must try to remember this time! :)

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Re: Additional SP query

#212014

Postby XFool » April 2nd, 2019, 11:31 am

Just to add that the reasons GMP and SERPS was ended and replaced by the Reference Scheme were because:

a) On 19 May 1990 the EU gave a final ruling on the 'Barber Case' (Barber vs Guardian Royal Exchange) meaning employer schemes had to give equal pension rights to men and women. (I believe, when it comes to payments of GMP, this may still be a live issue)

b) The existing state pension arrangements (including SERPS) were already considered by the government to be unsustainable and a more affordable alternative was needed for the long term.

From 6 April 1997 contracted-out rights were based on a new system, thus explaining the 'Pre 97' line in the SP statement. That's what my pension bible tells me. Should have consulted it more thoroughly, originally.

I tried to find the answer from the DWP site but the newer 'customer facing' GOV.UK sites are all pretty basic when it comes to information and seem unlikely these days to be a source of detailed technical background documentation.

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Re: Additional SP query [GMP]

#215231

Postby PinkDalek » April 15th, 2019, 5:18 pm

XFool wrote:... As this line in the SP statement is solely to do with increases in the GMP (I was contracted out) paid via the state pension so, from the date the GMP was replaced by the Reference Scheme Test for contracted out work pensions, it had no further relevance.

Must try to remember this time! :)


Me too but I remembered you'd posted about the Guaranteed Minimum Pensions, when looking today, so that's good.

In so far as I am concerned, I don't think my (not yet due) State Pension will be impacted but I'm certainly not sure.

What will be is my occupational pension that I'm already drawing (early). Up to now I'm receiving increases on the entirety based on RPI but subject to a maximum of 3% per annum.

When the State Pension Age arrives, part of that pension will be deemed to consist of GMP (if I've understood correctly).

My recently received Pension Scheme annual statement says:

Your GMP accrued before 6 April 1988 is not increased by the Scheme; it is increased by the State, in line with the rise in the Retail Prices Index.

So overall in times of generally low inflation (however one calculates it), I don't think my existing pension will suffer to any great extent in that there will be some increase one way or the other (if no deflation).

Does that make any sense to you or have I misunderstood it all (which is most definitely a possibility)?

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Re: Additional SP query [GMP]

#215244

Postby XFool » April 15th, 2019, 5:56 pm

PinkDalek wrote:When the State Pension Age arrives, part of that pension will be deemed to consist of GMP (if I've understood correctly).

My recently received Pension Scheme annual statement says:

Your GMP accrued before 6 April 1988 is not increased by the Scheme; it is increased by the State, in line with the rise in the Retail Prices Index.

So overall in times of generally low inflation (however one calculates it), I don't think my existing pension will suffer to any great extent in that there will be some increase one way or the other (if no deflation).

Does that make any sense to you or have I misunderstood it all (which is most definitely a possibility)?

Sounds correct, but my only practical knowledge comes via the 'old' State Pension.

Before reaching state retirement age your work DB pension is a single annual amount which is increased by (RPI)/CPI. When you reach state retirement age your work DB pension amount becomes banded into components. Looking at mine:

Pre 88 GMP - State Pension SERPS Indexed
Post 88 GMP - Personal Pension Indexed to Max 3% (I believe any extra indexation above 3% will be paid via SP)
Pre 97 Excess - CPI Indexed
Post 97 Excess - CPI Indexed
Post 05 Excess - I don't know

The Pre 88 GMP + Post 88 GMP = COD (Contracted Out Deduction from SERPS) on State Pension statement.

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Re: Additional SP query [GMP]

#215271

Postby mc2fool » April 15th, 2019, 9:05 pm

PinkDalek wrote:In so far as I am concerned, I don't think my (not yet due) State Pension will be impacted but I'm certainly not sure.

What will be is my occupational pension that I'm already drawing (early). Up to now I'm receiving increases on the entirety based on RPI but subject to a maximum of 3% per annum.

When the State Pension Age arrives, part of that pension will be deemed to consist of GMP (if I've understood correctly).

My recently received Pension Scheme annual statement says:

Your GMP accrued before 6 April 1988 is not increased by the Scheme; it is increased by the State, in line with the rise in the Retail Prices Index.

So overall in times of generally low inflation (however one calculates it), I don't think my existing pension will suffer to any great extent in that there will be some increase one way or the other (if no deflation).

Not quite, and if that's a recent statement from your scheme, and that's all it says, it's misleading/wrong. The effect of the New State Pension on GMP increases is complex and something that's not been well publicised.

The way GMP works/worked was that the pension scheme would pay inflation increases on post 88 GMP up to 3% and the state would pay all of the pre 88 inflation increases and the greater-than-3% (if any) post 88 increases.

The way this was implemented in payment was via the Additional State Pension. DWP would calculate your "gross" ASP, as if you'd never been contracted out, and apply inflation increases to that, and then subtract the GMP that your scheme was paying you to arrive at your "net" ASP, which would be added to your old state pension. (The GMP amount subtracted is called the Contracted Out Deduction. In £ terms COD = GMP.)

So, you can see, if, e.g., you'd been contracted out all your life (including pre-88), and your scheme used the pre-GMP-age GMP revaluation method that matched ASP increases (not all do but let's keep this simple!), then at state pension age your gross ASP and GMP (and hence COD) would be the same, so what you'd get from the state for net ASP would, that year, be zero. Which is, of course, the point of contracting out: the GMP you receive from the scheme replaces the ASP you would have got from the state.

Come the next year the whole of gross ASP goes up by inflation but only the post-88 GMP goes up (and then only by max 3%), so your overall GMP (and hence COD) goes up by less than the gross ASP does, so gross ASP minus COD is more than zero and you get a little net ASP to make up the difference. The year after that the difference between gross ASP and GMP gets a little bigger, and so on (assuming no deflation), so as the years go on gross ASP minus COD increases and you get an increasingly larger net ASP to make up the "shortfall" from the GMP.

But that's under the old state pension system. Under the new state pension there is no ASP and the gross ASP minus COD figure is fixed and forever immortalised in your April 2016 "starting amount" that goes into your new state pension calculation. If it's zero that's it, it will never increase, the zero is baked into your starting amount.

Sounds bad? Well it is for anyone that reached state pension age soon after April 2016 and has been fully contracted out all their lives; they'd get no ASP at all, ever, just a new state pension starting at their old state pension amount, and no pre-88 GMP or post-88>3% GMP increases, ever.

However, it's not so simple or so bad for everyone, as people with some years to go (who can accrue additional years) and/or with larger starting amounts get the benefit of the whole of the new state pension being increased by the "triple lock" and not just the CPI amounts the ASP was increased by. It's complex. :D

There's a House of Commons Library Research Briefing on the matter at https://researchbriefings.parliament.uk/ResearchBriefing/Summary/SN04956. That page is a summary, the full report it references is a 19 page PDF, and also of interest, in particular for looking at case studies of winners & loses from it, is the National Audit Office (NAO) 41 page report it summarises and references. Warning: it's multiple mugs of tea/coffee reading! ;)

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Re: Additional SP query [GMP]

#215303

Postby PinkDalek » April 15th, 2019, 11:36 pm

Thanks, I was hoping you'd reply and it will take me some time to attempt to understand. No, that sentence wasn't the only one in the recent statement. It included the standard others re pre and post 1988 and 1997 etc and I'll look again in more detail when time is available.

Probably once I've received my recently applied for up to date State Pension Statement (as advised by you and others in quite a few Topics on here) and then look back over your detailed posts on here and some of those from TMF (saved via the waybackmachine).

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Re: Additional SP query [GMP]

#215305

Postby mc2fool » April 16th, 2019, 1:31 am

PinkDalek wrote:Thanks, I was hoping you'd reply and it will take me some time to attempt to understand. No, that sentence wasn't the only one in the recent statement. It included the standard others re pre and post 1988 and 1997 etc and I'll look again in more detail when time is available.

Probably once I've received my recently applied for up to date State Pension Statement (as advised by you and others in quite a few Topics on here) and then look back over your detailed posts on here and some of those from TMF (saved via the waybackmachine).

Ok, but if they are telling you, as a person who has yet to reach state pension age, that the state will be providing pre88 and post88>3% GMP increases then that's just plain wrong. Nobody reaching SPA after April 2016 will be getting any GMP increases from the state.

Yes, I definitely encourage you, and everyone, to get a State Pension Statement and to get statements from their company pension schemes and to take the time to understand them in full, to know both what to expect and what choices you may have.

However, when it comes to trying to figure the net effect of the new state pension in regards to GMP increases, I recommend you don't bother ... it's complex and convoluted, it's hypothetical, and there's nothing you can actually do about it. :D


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