Section 32 Buyout Contracts
Background of section 32 buyouts or pension buyout bonds
Also known as pension buyout bonds, section 32 contracts were designed to accept transfer values from, primarily, final salary pension schemes. Although enjoying some valuable guarantees, an individual’s eventual Section 32 pension benefits may not be as high as those offered by the main employer’s scheme, but may be higher than a personal pension.
Benefits from an employer’s final salary pension scheme
When you leave service before reaching pension age, this scheme grants an annual pension (your ‘preserved pension’) which then increases, each year, after your date of leaving. These increases are typically granted in line with increases in price inflation but some schemes grant more generous increases to part of your pension: up to 8.5%, in fact.
Benefits transferred from a final salary pension scheme to a Section 32 buyout
Part of the benefits transferred over will benefit from the same level of guaranteed increases offered by the employer’s scheme (this is known as the Guaranteed Minimum Pension – GMP) but the remainder will benefit or suffer from the performance of an investment fund. There are, however, circumstances in which the value of the holding in the investment fund may be swallowed up in meeting the cost of the GMP.
You may especially have a legitimate pension claim if the risks of losing valuable guarantees were not explained to you when you were advised to transfer to a Section 32 buyout.
Benefits transferred from a final salary pension scheme to a personal pension
There are no guarantees within the personal pension. The pension scheme member’s benefits will be entirely dependent on the performance of investments within the Personal Fund. This lack of guarantees by no means infers that a personal pension transfer represents bad advice; it all depends on factors such as the member’s risk profile and the desire for death benefits.