It is a pension transfer plan scheme where a company pension scheme is transferred to a scheme in the name of the individual member by the trustees of the employer’s pension scheme. It is a company scheme transfer plan.
Section 32 of the Finance Act 1981 for the first time allowed the pension scheme trustees to transfer your 'company pension' benefit to a scheme in your own name, technically your employer has 'bought out' of their liability to offer you the pension. This is why it is known as a S32 Buy Out.
Where can pension transfers come from?
- Statutory Schemes - e.g. Government schemes such as the Civil Service Scheme (if allowed)
- Money Purchase Occupational Pension Schemes
- Final Salary Related Occupational Pension Schemes
- Other Section 32 Buy Out Plans
- Free Standing Additional Voluntary Contribution Schemes - FSAVCs
Can I pay in any more on top?
No additional pension contributions can be paid in a S32 Buy Out scheme - the plan only accepts pension transfers from other pension schemes. Contracting out is not available as an ongoing basis and additional transfers cannot be accepted.
What is Guaranteed Minimum Pension GMP element? (Many people have GMP inside their old company scheme on in their S32 Buy Out)
Part of your National Insurance Contributions are used to pay for your Basic State Pension. In addition, some of your contributions also used to pay towards a second tier State Pension called the State Second Pension (S2P), it used to be known as SERPS (State Earnings Related Pension Scheme).
For most working employees therefore, they built up two state pensions. However, your company pension if you have one, used to be able to elect to 'contract out' of the State System just for this second tier pension and have it paid into your own pension. Contracting out has now stopped.
Where a final salary company pension scheme was/is 'contracted out' , it used to have to guarantee to provide a minimum pension at least equal to that of SERPS. This is called the Guaranteed Minimum Pension (GMP).
Therefore some final salary scheme pension transfers to a S32 Buy Out have an element of GMP in them. A S32 Buy Out Plan can receive GMP and continue to protect those guarantees. Transfers in can only be accepted where there are sufficient funds to provide the Guaranteed Minimum Pension liability. GMP has no unisex annuity requirements.
In summary, your S32 Buy Out policy may have two elements
- Guaranteed Minimum Pension (GMP) - the scheme must guarantee to pay at least this at retirement. The GMP increases in value each year, depending the year your left the company scheme.
- Non GMP (normal pension benefits) - sometines known as the Excess Over GMP. Any pension benefits that are not linked to providing the GMP part are known as excess pension benefits.
GMP Shortfall - What if S32 Buy Out Returns are low?
- If investment returns or bonuses are poor, there may not be enough money in the fund to fund/cover/pay for the increased/adjusted GMP pension.
- If this is the case, the S32 Buy Out Provider is unlikely to allow you to transfer the S32 pension elsewhere
- They will stand the loss and make up the shortfall.
- In these cases, it may mean that you lose some or all of any normal pension benefit your transferred inside the S32 as these may be used to hekp with any GMP shortfall.
Transfers Between Section 32 And Personal Pension Contracts
- A Section 32 plan may be transferred to a Personal Pension but a Personal Pension generally has no need to transfer into a S32 as it has no GMP.
- If there is a GMP shortfall, see above, you may not be allowed to transfer the Section 32 Buy Out.
Pension Fund Guarantees
As mentioned earlier, the GMP is a guaranteed pension with some inflation/revaluatiuon protection i.e. it increases each year.
If there are GMP requirements the normal retirement age may have to be the same as the transferring final salary scheme (but benefits under the Section 32 may be taken earlier or later, but no later than age 75). Otherwise the retirement date is chosen by the member and can be any time between 55 and 75 (used to be 50 before 2010).
Transfers which do not include GMP may be taken as early as age 50 (earlier on ill health). Transfers which include GMP can only be taken before GMP retirement age (65 male and 60 female) where the fund value is sufficient to cover the provision of GMP at GMP retirement age or the widow(er)’s GMP at earlier death.
Tax Free Cash
Funds can be used to provide tax-free cash up to the Inland Revenue maximum (excluding the fund being used to provide GMP). If much of the fund has to be used to provide the guaranteed minimum pension, the balance if any can provide tax free cash.
A single Section 32 Buy Out policy cannot be used for phased retirement although it is possible to divide the transfer value amongst a number of providers. The GMP element can only be with one provider.
Death Before Retirement
The fund in excess of the widow’s GMP, which must be provided, can be taken as a lump sum subject to Inland Revenue normal occupational pension scheme limits. The overall maximum of four times salary plus a return of member contributions (plus interest) is allowed. The balance of the fund can be used to provide a dependant’s pension. Contact us for Expert Pension Advice.