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Section 32

Audley provides clients with an extensive independent review and advises on deferred company and private pensions.

 

Final Salary Defined Benefit. Occupational Money Purchase. Personal Pensions. Section 32’s and Deferred Annuities.

Section 32.

A policy or contract bought from an insurance company using funds from a registered pension scheme.

What is a Section 32 policy?

This is a policy or contract bought from an insurance company using funds from a registered pension scheme. The policy provides for an annuity at some point in the future – a deferred annuity contract.

Section 32 policies could be used if:

  • an occupational scheme is about to wind up and/or
  • the member has left the employment of the employer running the occupational scheme and they wish to transfer to a deferred annuity contract rather than another employer’s scheme, personal pension, or stakeholder pension.

 

How does a Section 32 policy differ to a personal pension?

A Section 32 policy cannot receive any further contributions or separate transfer value payments once it is set up.

Since 2006, they’re both treated the same way for pensions tax purposes. However, before 2006, the main differences were that a Section 32 policy:

  • was governed by occupational rules and limits on the benefits that could be taken
  • accepted guaranteed minimum pensions (GMP) derived from the ‘contracting out’ of salary-related pension schemes from state earning related pension / State Second Pension.

Tax-free cash is similar to that of any other registered pension scheme unless the individual was entitled to a larger lump sum under their previous scheme as at 5 April 2006.

If this is the case, the tax-free cash would be the value of the lump sum that could have been paid had the individual become entitled to it on 5 April 2006. This is based on an assumption that the member is in good health and no reduction for early payment applies. This figure is subject to the maximum tax-free cash allowable under HMRC rules before 6 April 2006.

 

Providing GMP

The Section 32 must guarantee to pay at least the GMP from the previous scheme at age 60/65 (due to the way the legislation is written, even though State Pension age is increasing, the age for GMP stays at 60/65).

The Section 32 provider must make up any shortfall in funds to provide the GMP. As such, if the fund value doesn’t cover the GMP revalued to age 60/65, transfer and early retirement can be prevented.

 

Section 32s and pension flexibility

The availability of options at crystallisation will be determined by the scheme rules. If a S32 plan holder requires access to flexibility and it’s not offered by the current scheme, they may need to consider transferring the benefits to a scheme that offers the required options (assuming the trustees of the current scheme are prepared to offer a transfer). However, this may have an impact on any protected retirement age and protected tax-free cash and result in the loss of the safeguarded benefit provided by any GMP element retained within the scheme.

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