What Is A Section 32 Buy Out Policy?
Have you ever heard of a Section 32 Buy Out policy? If not, you are not alone. Also known as S32s, these policies have largely been left by the wayside as a result of the personal pensions introduced in the 2006 reform legislation. Yet there is still a handful of older consumers who still hold Section 32 Buy Out policies purchased years ago.
In short, a Section 32 Buy Out policy is a contract between an investor and a pension provider (typically an insurance company). The investor transfers funds from an existing workplace pension or a previously frozen pension into the policy in exchange for future retirement income.
The government established the S32 policy as part of the 1981 Finance Act. The original intention was to allow workers and former employers to transfer built-up pension benefits into a new vehicle rather than leaving them frozen at the termination of employment. Some companies chose to exercise this option as a means of providing relief to a small number of pension savers remaining in a plan that was being wound up. For all practical purposes, S32s are nearly extinct except for a limited number of policies that have yet to be cashed in.
S32 a Deferred Annuity
HMRC describes the Section 32 Buy Out policy as a deferred annuity. This description is actually fairly accurate. As you may already know, an annuity is essentially purchased income provided by an insurance company through your pension funds. At retirement, you use all the money in your pension pot to buy the annuity that, in turn, guarantees you income for life. That's pretty much how the Section 32 Buy Out works. The only difference is that income is targeted for the future.
Where a standard annuity begins paying out immediately, an S32 does not pay out until later. Consider a 55-year-old man who purchased a policy back in 2000 for the purposes of consolidating multiple frozen pensions into a single instrument. That policy continues to mature until the man reaches retirement age. At that point, the policy provider begins making income payments as determined by the contract.
In that sense, a Section 32 Buy Out policy is a low-risk investment with a guarantee of retirement income. The problem with these policies is that their rates of return are not always that high. It is entirely possible for someone who purchased a policy three decades ago to find that his or her retirement income is less, in real terms, due to inflation and exceptionally low interest rates.
Benefits of a Section 32 Buy Out Policy
The primary benefit of investing in a Section 32 Buy Out policy is the guaranteed retirement income for life. For a lot of people, the guarantee is everything. It enables pensioners to accurately budget their funds because they always know what will be coming in. In fact, you could make the case that the guaranteed income component was the major driving force behind the purchase of these policies in the 1980s and 90s.
Assuming you also contribute to a workplace pension through your current employment, the S32 offers the additional benefit of supplemental income. The income is supplemental in the sense that your current workplace pension and state pension combined will hopefully be enough to pay your bills. What you get from your S32 will be extra income that you can use to do the thing you have always wanted to do.
A third benefit of the S32 is that insurance companies are required to pay what is known as the guaranteed minimum payment (GMP) to members. That means the annual payment on your policy cannot be any less than the established government GMP. The provider must make up the difference if investment returns do not provide enough to cover the payment.
Of course, there are plenty of negative aspects related to Section 32 Buy Out policies. Those negative aspects outweigh the positive in an era of personal pension options and the recently-implemented pension reform.
Negative Aspects of Section 32 Buy Out Policies
Do you currently hold a Section 32 Buy Out policy? If so, are you familiar with how it works? Section 32 Buy Out policies can be complicated and difficult to understand. The policy owner who fully understands how his or her S32 works will also understand that there are some negative aspects to contend with. Those aspects are as follows:
- One-Off Decision – Because the S32 is essentially a deferred annuity, it is a one-off purchase that cannot be reversed. Once the transaction is complete, you are stuck with the policy for better or worse. There are rumours that the government is considering new legislation that would allow the sale of S32s and annuities by owners, but that has yet to come to fruition.
- Cash Disbursements – S32 schemes are eligible to pay lump-sum payments to members who are at least 55 years old. However, the total amount of the individual's pot must exceed the GMP in order for tax-free payments to be made. No money can be withdrawn from a pot with a value less than GMP.
- Low Returns – The returns generated by S32s have plummeted in recent years. A combination of low interest rates, other personal pension options, pension reform, and economic malaise have made purchasing a policy unattractive to most investors.
- Additional Contributions – The status of the S32 as a deferred annuity means you cannot contribute any additional funds to it once it has been purchased. Any growth your pot enjoys will be the direct result of the investments your insurance company makes.
Comparing the benefits and negative aspects of Section 32 Buy Out policies may make it seem as if these policies are not worth purchasing. For most people, this is true. There are far too many more attractive options available. However, the S32 may not be completely out of the question in every case.
Complex Investment Vehicles
At the end of the day, the Section 32 Buy Out policy is a complex investment vehicle that can be difficult to understand. Not only is the legislation establishing the policy outdated, but younger financial advisors have little experience dealing with them. It is not unheard of for investors to be completely in the dark about managing a currently held S32 because of a lack of knowledge and qualified investment advice.
Given that UK pension investing is so complicated, we cannot mention too frequently the need to utilise a certified financial advisor for the purposes of financial or retirement planning. A financial advisor is trained in the best ways to help you make the most of your money. He or she is also familiar with all of the finer points of investing. That makes the certified financial advisor the most qualified person to help guide you through your retirement plans.
If you already own a Section 32 Buy Out policy, you own it for life. Include it in your retirement planning as a source of guaranteed income in retirement. Assuming that the resulting income will not be enough to provide most of what you need, you will need other investment options to go along with it. Consider one of your other pension choices or, if you are not averse to risk, investment opportunities with the potential for greater return.
The Section 32 Buy Out policy was a much-needed pension option in its day. However, that day has long since passed. The average consumer can do far better today by choosing one of the other personal pension plans now available.
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