When it comes to pension schemes, there are a lot of terminologies that can be overwhelming to comprehend. One of these is the contracted out money purchase scheme (COMPS) GMP. In this article, we will break down this term and provide a comprehensive guide on what it means.
What is a contracted out money purchase scheme?
A contracted-out money purchase scheme (COMPS) is a type of pension scheme in the UK that an employer sets up and contributes to on behalf of its employees. The scheme is usually contracted out of the State Second Pension, which means that the employer and employee pay a lower rate of National Insurance contributions.
The aim of this scheme is to provide employees with a private pension similar to the State Second Pension, also known as the Additional State Pension. The contributions made by the employer and employee are invested in a fund that aims to grow over time.
What is a GMP?
A Guaranteed Minimum Pension (GMP) is a type of pension benefit that was offered to members of defined benefit pension schemes between 1978 and 1997. It was a minimum amount that was guaranteed to members who had contracted out of the State Earnings Related Pension Scheme (SERPS) or State Second Pension (S2P).
The GMP is payable from the age of 60 for women and 65 for men and is generally linked to the rate of inflation. It is not a separate pension scheme, but rather a benefit that is paid as part of a member`s defined benefit pension scheme.
What is a COMPS GMP?
A COMPS GMP is a Guaranteed Minimum Pension that is provided by a contracted-out money purchase scheme. This means that there is a fund of money that has been invested on behalf of the employee and employer to provide a pension. However, there is also a minimum amount that needs to be paid to the employee when they retire, which is guaranteed by the government.
The COMPS GMP is calculated using a formula that takes into account the employee`s earnings and the number of years that they have been a member of the scheme. The amount that is guaranteed is the higher of either the GMP or the amount that has been accrued in the pension scheme. This means that if the investment fund has performed well, the employee may receive more than the GMP.
In conclusion, the contracted out money purchase scheme GMP is a type of pension benefit that is guaranteed by the government and provided through a private pension scheme. It is important for both employers and employees to understand the benefits and limitations of this scheme to make informed decisions about their retirement planning.
