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What is the Guaranteed Minimum Pension?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 16 November 2016
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The guaranteed minimum pension is a measure provided to members of the State Earnings-Related Pension Scheme (SERPS) in the United Kingdom who were contracted out by their pension plans between 1978 and 1997. Under the rules, people who were contracted out are entitled to pension earnings equivalent to those they would have earned if they had stayed in SERPS. This is designed to prevent people from being underpaid on their pensions.

When SERPS was established in 1978, employers were offered the option of opting out of the plan and providing their employees with an alternative service. In exchange, they were charged a different tax rate. To opt out of SERPS and contract out employees, however, it was necessary to provide them with a guaranteed minimum pension. This ensured that employees were not ill-served by being contracted out, assuring them of an income equivalent to that earned by people under SERPS.

This only applies to people who were paying into pension plans between 1978 and 1997. People with payments outside this period are only entitled to guaranteed minimum pension covering the years they worked within this period, if they worked at all. Pension schemes that contracted out their members are required to provide a guaranteed minimum pension and to offer information about it to their members.

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Pensions are designed to support people during old age, although the funds provided are usually not enough to live fully independently. Members of pension schemes can also set funds aside in savings and investment accounts to supplement pension income. Calculating guaranteed minimum pension can get quite complicated, as pensions are based on cost of living increases and other factors, and it may be necessary to use multiple calculations to determine the amount of money someone is entitled to.

SERPS itself was replaced in 2002 with a different plan with a more streamlined design that included measures to protect low-income people; such individuals pay less into pension plans and are thus entitled to less. This can result in a pension so low that the benefits are not enough to live on, putting low-income workers at a high risk of being in poverty after retirement and being unable to afford the costs of living.

People entitled to a guaranteed minimum pension can get more information from their pension plans about how the pension payments are calculated and how much money they are entitled to during retirement. This information can be used in retirement planning.

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