Pensioners
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  • Pensioners

    Pension increases

  • The ins and outs of GMP

    In 1978 the government introduced a new state pension scheme known as SERPS (the State Earnings Related Pension Scheme). It is only available to people in employment and is paid for through the National Insurance contributions. When contributors reach state pension age, they receive this additional state pension calculated as a percentage of their earnings.
    As pensions are very expensive, the government invited employers to pay the SERPS pension to their employees on the government's behalf. In return both the employer and their employees would pay lower National Insurance contributions. The majority of employers, including all the railway employers, accepted the government's offer.
    This arrangement is known as 'contracting out'.
    Before a pension scheme could contract-out of SERPS, the government had to be satisfied that the benefits from that scheme were at least as good as, if not better than, the benefits from the State Earnings Related Pension Scheme. The railways pension schemes passed this test.
    As a guarantee, if, for some reason, the scheme pension at state pension age was less than the SERPS pension would have been; the higher pension must be paid. That is why it is called a guaranteed minimum pension (GMP).
    Members of a contracted-out scheme will earn GMP for their membership between 6th April 1978 and 5th April 1997.
    How a GMP works
    If you were a scheme member at any time between the above dates, when your retirement pension was calculated, it was split into GMP and non-GMP elements because different rules apply to the different elements. There are three GMP rules that you may become aware of:
    • You cannot convert any of your GMP element to cash and this may have restricted the amount of tax free cash you would have liked to have taken on your retirement.
    • If you retired before state pension age, your pension may increase at state pension age to bring your pension up to the guaranteed amount.
    • After you reach state pension age the government pays some of the increases on the GMP part of your pension.