Notional GMP at Early Retirement of Defined Benefits Scheme
sarah_d
Member
We have a client who intends to retire early (age 55) from a DB (Diageo) Scheme with GMP benefits.
Prior to GMP age, the scheme revalue GMP benefits at scheme level (notional GMP) rather than the much more generous entitled ‘Fixed’ rate if taken at GMP age - this makes the Scheme pension look fairly unattractive at age 55 in comparison with the CETV. If however the scheme pension is taken at age 55, the notional GMP element will be recalculated again at GMP age with an uplift applied at that time (to account for Fixed revaluation).
Unfortunately, the scheme are unable to illustrate this for comparison purposes, therefore it is difficult to demonstrate with certainty what the client might be entitled to from GMP age, but based on our own estimations, this could be considerably more.
Our advice will be based on the retirement options available now at age 55 but we do not feel we can ignore what the Scheme could potentially offer at GMP age.
I would be interested to hear who has had previous experience of this and how you approached it.
Comments
You are right to identify that you can't ignore this issue.
You haven't said, but I've inferred from your references to the CETV that you are giving advice on a possible transfer. In this case you must produce a TVC to the scheme NRA (COBS 19 Annex 4B) as part of the APTA and this must be included in your suitability report. The TVC process will calculate the expected benefits at NRA without having taken them early. This is the primary value judgement you should use in the APTA.
GMP doesn't exist until GMP age. What the scheme does regarding notional GMP on ERA is largely irrelevant (although many will use a notional figure). Whatever pension it provides before GMP age, the scheme must provide the fixed rate GMP at GMP age, revalued to that age. If the scheme is saying that an uplift is payable, it's difficult to know what is going on without more information, but it is possible to forecast the pension uplift.
The minimum pension payable at GMP age will be at least the fixed rate revalued GMP, which you can calculate as a certain amount (or rather the TVC to NRA will give you this figure). If an uplift is payable, then all, some or none of the excess pension will "franked" as part of this process. Whether it is all, some, or none will determine what your forecast will be.
You will therefore need know how the scheme treats the excess pension on early retirement when the member reaches GMP age. There's a useful pdf document at the bottom of the linked page that explains it in more detail. The scheme will be able to tell you this. Once you know, you can model a step up at GMP age in your cashflow software to show the personalisation of the APTA to the client's situation.
https://expertpensions.co.uk/lets-be-frank-what-do-you-know-about-gmp-franking-by-douglas-watson/
Ultimately however, if you're giving DB transfer advice with a view to retiring early, it's not only these scheme early retirement figures you need to be looking at. You have to prove beyond any doubt that the client cannot meet their objectives to retire early unless they transfer. If they can do it another way, whether it's through savings, investments or they take this scheme pension at age 55, then you shouldn't recommend a transfer.