A tax on pensions, no one saw coming.

grim reaper3

The single state pension , coming to a pensioner near you , from April 2016 is supposed to be simple. It will operate under the same rules for everyone. But that doesn’t mean that everyone will get the same pension (as this tale tells), and sadly it doesn’t mean that everyone will be winners

One group that look like losing out are the “lucky” people who were in final salary schemes that were and still are contracted out of the State Second Pension (formerly called SERPS).

When Barbara Castle introduced SERPS in 1978, employers who take the trouble to fund and manage defined benefit schemes could pay reduced rate national insurance for those in the scheme, if the scheme chose to contract out and Guarantee a Minimum Pension for the workers.

After 1988, some of the cost of index-linking was passed back to the employer, although the Government was still there to pay the top-up if and when inflation exceeded 3pc.

But, and this is the important bit, the schemes only had to be funded to guarantee a flat rate pension, they did not need to offer top-up increases on the Guaranteed pension because the State would pay these (and pick up the bill).

What’s the problem?

Under the arrangements that take effect from April 2016, these people won’t get the inflation-linking benefit any more. The Government won’t pick up the bill, and if you want your increases back, you’ll have to do it yourself, either from a drawdown arrangement or buying extra state pension (if you are allowed).

In our low-to-zero inflation age, this perk might not seem valuable. But when it comes to pensions, payable over a period of decades, it really is precious.

If a 65-year-old wants to buy an annual income for life of £10,000, without inflation proofing, it will cost about £200,000. If he wants to buy an income for life starting at £10,000 and then rising in line with inflation of 3pc, it will cost £300,000. That’s the value of index-linking.

At the moment, for those who are retired, the Government’s inflation-related contribution to their contracted-out pension is effectively made along with their basic state pension. For these people, nothing will change under the new arrangements.

But when the Government started the move to a single-tier state pension, no provision was made for making inflation-related payments to those reaching state pension age after April 2016.

Are you a loser?

Very probably yes, but possibly no – depending on the extent to which your company has been paying pension increases on your Guaranteed Minimum Pension. I know of one large scheme that thinks it has been paying these increases by mistake!

I work for a firm of actuaries, we spend a lot of our time exploring just what a scheme is or isn’t paying by way of Guaranteed Minimum Pensions. This exciting game is known as GMP reconciliation and it is played on computers by geeks.

The truth is that there has been so much to-ing and fro-ing between the DHSS/DSS/DWP and the occupational pension schemes, that many schemes are unclear whether they’re paying GMP increases and if so, how much.

The conversations are conducted in earnest nowadays as the end of contracting-out means that matters have to be drawn to a close. Long words such as “crystallisation and cessation” are bandied around, to use a more vulgar phrase “the shit is about to hit the fan”.

With the end of contracting out, the cashflow advantage to companies paying reduced rate national insurance comes to an end. This will make carrying on promising to pay the old benefit promises will become even more expensive to companies and to members.

Either contributions will go up, or the scheme will have to move to a different pension benefit structure- typically a defined contribution structure – at least for future pension rights.

The bottom line is that the end of contracting out is bad news for occupational pension schemes and bad news for most people who have been contracted out via a Guaranteed Minimum Pension.

How big a loser?

How much will they (we)  lose? That will depend on the size of their contracted-out pension, the rate of inflation and how long they live. But with inflation factored in at 2pc‑3pc, actuaries estimate the figure at up to £20,000 for men and slightly more for women, because they live longer.

Is this a cover up?

Well put it this way, if there’s a shred of comfort for Steve Webb, it’s that he’s not going to have to deal with this mess! The DWP have been, at best, economical with the truth, but since Ruth Gilbert broke this story on this blog , following great investigative work by Richard Dyson in the Daily Telegraph, I’ve been having a few conversations which suggest that the DWP have been at best “economical with the truth”.

In a former guise, this would have been food and drink for Ros Altmann, who’d have had a campaign running on this by now. I am absolutely sure that Altmann knows exactly what is going on and probably has the numbers.

It will be an early test for her, how she manages the communication of this little glitch in what has so far been a very successful project. Was this cut pre-meditated or accidental, is it a stealth tax or a bungle? That’s for Ros to assess and communicate.

What is for sure is that the Treasury will look askance at any special pleas for compensation to those losing out from the glitch. What is interesting to me is to understand to what extent state members of state funded schemes (including the civil service schemes) will be protected.

What about the public sector?

To some extent it may be better that “we’re all in it together” , as those in corporate DB schemes may find the cuts unwelcome but not unfair. If there is a sniff of ring-fencing the public sector increases, that may be another thing.

But the bigger issue is that if the cuts impact public sector DB pensions to the extent they do private sector schemes, then we can expect an outcry from unions like UNITE and UNISON on behalf of the millions of workers who have here-to-now had just about everything indexed to the hilt!



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in pensions, Pensions Regulator, Ros Altmann and tagged , , , , , , , . Bookmark the permalink.

18 Responses to A tax on pensions, no one saw coming.

  1. Gerry Flynn says:


    You have to remember that back in 1978 the Government of the day along with the opposition actively encouraged schemes to C/Out, through the incentive of reduced NI conts for employers and employees. Government wanted to shift the responsibility for paying SERPS away from the themselves to the employer, that’s why 10 million + employees became C/out. As long as the pension fund provided a pension greater than GMP, which in 99% of cases they did. The way C/out has been portrayed gives the impression that companies who’s pension schemes who went down this route were screwing the employee, which they were not.

    The position as I have always understood it is that the scheme increased the whole of someone’s pension each year until they attained NRA, then the GMP was cut out and the State became responsible for any increases. If the situation post April 2016 for people attaining NRA is that the pension fund becomes the provider of GMP increases surely this is going to impact on funding levels?

    What obligation, ( moral or legal), is the pension fund under to provide increases to GMP’s post April 2016 or will we go back to the days of “Franking”?

    Whether Dr Altman does anything about this we shall wait and see but I shall not hold my breath considering “Gideon” want’s to make billions in savings, so every little will help.

    • henry tapper says:


      I think your understanding correct. I am not sure whether many employers will stand for the extra funding for taking on this – voluntary- obligation and that the losers will be the members

  2. Gerry Flynn says:


    A question regarding the new state pension and the DWP’s intention to offset the notional GMP against it, which is fine. That’s provided the GMP the DWP use is the same amount as the pension fund has calculated. However, I am understanding that the DWP will use all periods of C/out to calculate the notional GMP.

    Now comes the troubling bit, what about those people, and I am one of them, who took refunds of contributions from the pension scheme and had an amount deducted to reinstate them back into SERPS for the period they were C/out. Is the DWP going to count this period for the calculation of the notional GMP and therefore inflate the amount that is deducted from the new single tier state pension regardless of the fact that you paid back broadly the equivalent of the difference between being C/out and C/in?

    Please tell me I have misunderstood what the DWP are doing or is this yet another way of saving money?

    • henry tapper says:

      Jerry. I very much doubt it. Once out, always out- seems to be the order of the day. We need someone at DWP to do a question time- don’t we!

  3. Hi,
    I have been researching the subject of non payment of GMP increases with the state pension for over two years and it was me who brought it to the attention of Richard Dyson. I have also managed to get a article done in the Saturday Independent which was done by Neasa Macerlean on 10 January last year. “Losers who never knew in the switch to single-tier pensions”.

    If you are interested I can give you some other interesting information about the subject.

    • Gerry Flynn says:


      I would be interested in what you have found out.

      • Chris says:

        The main reason why the Government are not telling people about loss of GMP increases is that they deny that they pay the increases. This has been stated by me by the DWP and Steve Webb on several occasions even though I sent them copies of several of their own Government publications where they said they did which included statements from their booklet NP 46, House of Commons Library,HMRC,web site and National Audit Office (NAO) report about people in public service schemes receiving increases on their GMP twice. Correctly fr where DWP funds or part fundsom the state and incorrectly from the scheme. Event the Civil Service Pension Scheme mentions that the the state pays GMP increases.

        Because I was not getting anywhere with this I wrote to the Committee of Public Accounts in and received a reply from Margaret Hodge, Chair of the Committee where she said “Under current arrangements there are scenarios where the DWP funds or part funds, GMP indexation increases earned between 1978 and 1997. and then states recipients will lose indexation increases on GMP increases accrued between 1978 and 1997.

        In another paragraph it states the NAO has noted there are no details of scenarios wherpubliched in which an individual will receive less pension following the move to The New State Pension, and that there are no scenarios published that reflect potential impact of the removal of GMP indexation increases on contracted out pensions.

        I spoke to the NAO and do know they are investigating the matter of lack of information from the Government about loss of GMP increases.

        As far as I can see they are repeating the mistakes they had when they forgot to tell people that inherited SERPS was going to be reduced from 100% to 50%. The then Governments intention was to give about 14 years notice but for some reason the DWP forgot to mention it in their booklets.

        For some reason because the Government deny that they pay and fund GMP increases they are not giving people any notice about the change in legislation about GMP increases.

        If you give me your email I could send you copies of some of the information I have.

        What surprises me about all this is that when oral and written evidence was submitted to The Work and Pensions Committee on the single-tier pension not a single pension professional asked any questions about what would happen to GMP increases under single-tier pension.


  4. Gerry Flynn says:


    Send me a connection request.


    • henry tapper says:

      Will try

      • Gerry Flynn says:


        I is confused, why are you responding rather than Chris?


    • Chris says:

      What is a connection request and how do I send it to you.?



      • Gerry Flynn says:


        I assume you are on Linikedin, look me up and send a connection request to me or alternatively I send one to you but there are a number of Christopher Thompson’s and I do not know which one is you, can you give me a clue?

      • billopp says:


        I am not on Linikedin. I am the Christopher Thompson who responded to Tax on Pensions, no one saw coming.

  5. MS says:

    So now we know! Treasury will pay (somehow) the GMP increases for public sector pensions. Might this explain why the DWP tried to keep the loss of State-sponsored. GMP inflation protection quiet?

  6. Katherine says:

    I’m very concerned as I have a frozen defined benefit pension with GMP which I didn’t take at NRA 60 a few months ago, due to all the changes regarding pensions and the inability to find someone who could give me clear advice. My frozen pension total was then appox £9000 but 53% of that figure was protected GMP (19% for the Post 1988 GMP and 35% for the Pre 1988 GMP). Is anyone able to reassure me that the April 2016 changes will not reduce the overall total frozen pension figure I have been given if I am not taking the pension until after the changes have been implemented? All I could get as an answer from the Pensions Administrator was “to the best of my knowledge No”, which is not at all reassuring, also that I am now too late to take my frozen pension with a start date before the April changes come into effect. Even more concerning is that I won’t get the full State Pension when I eventually receive it, because of having contracted out.

    • henry tapper says:

      You should contact the chair of the Trustees and ask for your case to be considered urgently

    • Kenneth Thompson says:

      As you reached 60 a few months ago and assuming you are in the private sector even if you had taken your pension at age 60 you will never receive any increases on your GMP as you will not reach state pension age until after 6 April 2016 when the DWP will no longer pay GMP increases normally paid with the state pension under the current system. If you had reached state pension age before 6 April 2016 the DWP would have paid your GMP increases.

      Can you tell me when you reach state pension age and if you are in the public or private sector as there are different rules which are more favorable if you are in the public sector.

  7. Gerry Flynn says:

    I would go back to your pension scheme and ask to speak to the manager who should be able to give you a definitive answer. Your deferred pension will not go down from the value quoted, what happens to it when it comes into payment regarding future increases should be clarified in any communication sent to you from the pension scheme.

    The State pension is another matter, you need to get a pension forecast from the DWP to see how Contracting out has affected you.

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