Section 32 Buy-Out Plans
One of the most important of the older pension contracts is the Section 32 Buy Out Plan. If you have previously worked for an employer who provided a occupational pension scheme and then, on leaving that employment, you transferred your deferred pension benefits to an insurance company you may have used a Section 32 Buy Out Plan.
If on checking your old pension plans you find that you have one called a Buy-Out Plan then this section is for you.
Section 32 Buy Out plan
- A Section 32 or buyout policy is technically a deferred annuity plan and is used to accept the transfer of funds from an occupational pension scheme.
- It’s called a Section 32 policy as this was the section in the Finance Act 1981 that referred to deferred annuity contracts. It can also be referred to as a ‘buy-out policy’, as your pension benefit rights have been ‘bought out’ of your registered pension scheme.
- A Section 32 policy is bought from an insurance company using funds from a registered pension scheme.
- The pensions tax rules for Section 32 policies are broadly the same as those for personal pensions. But Section 32 policies are one-member schemes, with potential restrictions.
- A Section 32 policy cannot receive any further contributions or separate transfer value payments once it is set up.
- The tax-free cash sum from your Section 32 Scheme could be larger than the normal 25% if you were entitled to a larger lump sum under your previous scheme rules at 5 April 2006.
- Most importantly, Section 32 providers must guarantee to pay any guaranteed minimum pension (GMP) if you were contracted-out of the second tier State scheme under your previous occupational pension scheme. The guarantee is payable at age 60 for females/65 for males and must make up any shortfall to provide you with the Guaranteed Minimum Pension. This could be an extremely valuable benefit to you if the fund is not big enough to provide this level of benefits.
- It may not be possible for the Section 32 to be transferred to a personal pension if the Guaranteed Minimum Pension cannot be covered by the funds available.
What you should check
- What level of tax free cash is available? This could be larger than the normal 25% under current pension rules and could be as high as 100%.
- Is your pension fund sufficient to cover any Guaranteed Minimum Pension? Section 32 providers must make up any shortfall to provide the Guaranteed Minimum Pension GMP and a transfer to a personal pension plan would not be in your interests if the fund was not sufficient to cover this.
Links to more information about older pension contracts
- Retirement Annuity Contracts
- Guaranteed Annuity Rates
- Guaranteed Investment Rates
- Pension Term Insurance
- Protected Tax Free Cash
- Hybrid Pension Schemes (or Underpins)
- With Profits Funds
- Money Advice Service Pensions and Retirement
- If you need personal financial advice on Section 32 Buy-Out Plans then I am happy to introduce you to Flying Colours Life who have access to independent financial advisers throughout the UK
This information does not constitute personal advice and should not be treated as a substitute for specific advice based on your circumstances.
Information given relating to tax legislation is based on my understanding of legislation and practice currently in force. Whilst I believe my interpretation of current law and practice to be correct in these areas, I cannot be responsible for the effects of any future legislation or any change in interpretation or treatment. In particular you are warned that levels of tax and tax reliefs are subject to alteration and, in any case, the value of such reliefs and benefits may depend on an individual’s circumstances.
If you are in any doubt as to whether any course of action is suitable for you, then you should discuss the matter with a suitably qualified independent financial adviser or other specialist.