Pensions

Last updated:

Guaranteed minimum pension and index linking

The single tier State Pension is being introduced on 6 April 2016.

Between 1978 and 2016 the Government operated a two tier State Pension (made up of a supplementary pension in addition to the Basic State Pension) with the ability for individuals to 'contract out' of contributing to the second tier in return for lower National Insurance contributions (employees and employers).

Between 1978 and 2002 the second tier pension was known as the State Earnings Related Pension Scheme (SERPS) and between 2002 and 2016 it was known as the State Second Pension (S2P).

Many occupational pension schemes, including the NHS pension scheme, were contracted out of the second tier. As a consequence of contracting out the pension scheme is responsible for the payment of a pension at least equal to the second tier pension being forgone at state pension age. This alternative provision is generally known as the Guaranteed Minimum Pension (GMP).

Whilst the GMP is paid by the occupational pension scheme the cost of index-linking the benefit has always been paid, at least in part, by the Government. With the introduction of the single tier State Pension there is a risk that an element of the GMP will not receive any index linking.

However, the Government has advised that in relation to those retiring between now and 5 December 2018 their GMP will be fully index linked by their pension provider.

Read more information about this.

It is not presently clear whether the Government will still meet the cost of index linking the GMP of members retiring after 5 April 2018.

From 6 April 2016 contracting out will end and both individual members and employers will see their National Insurance contribution rate increase.