Buyout policies were used to transfer pension rights built up in a workplace scheme into an individual pension policy.
Buyout policies were introduced in the early 1980s under the Finance Act 1981. They were largely superseded by personal pensions when these were introduced on 6 April 1988, but you may continue to hold a buyout policy.
How buyout policies work
Buyout policies are individual contracts between you, the member, and the pension provider. The pension provider is usually an insurance company. They were also known as Section 32 buyout policies or s32 buyouts.Buyout policies were used by both employers and workers to transfer pension benefits built up in a workplace pension to an individual policy, usually after the worker had left the employer’s service or if the scheme was winding up .
These are special schemes as they were able to receive transfers which included contracted out benefits known as Guaranteed Minimum Pensions (GMP), these broadly represent pension income that you would have received from the State Earnings Related Pension Scheme (SERPS) had you not contracted out.
There is a requirement placed upon these schemes to pay out at least the GMP at retirement and the provider should make up any shortfall in the policy.
Investment returns on buyout policies
In recent years, investment returns on these policies have not been sufficient to meet the GMP and you may wish to contact your pension provider to discuss investment options and possibly seek advice.
As the policy is a deferred annuity contract this means that it will need to provide you with a pension at retirement, if the pot is not sufficient to provide you with the GMP, then no tax free cash will be available. Early retirement from these schemes is normally only allowed if your pot is large enough to meet the GMP.
On 6 April 2006, HM Revenue & Customs (HMRC) changed the tax rules to align them with those applying to personal pensions, prior to this rules on these policies were restrictive.
If you have previously contributed to a pension scheme, you may have retained benefits under the scheme. You may want to consider transferring the value of any old pensions to a new pension scheme. Please talk to us if you're interested in this.
Can I make contributions into my buyout policy?
Prior to 6 April 2006 it wasn’t possible to contribute to a buyout policy. From 6 April 2006 it’s been possible to contribute. However, there are only a relatively few number of buyout policies which will accept contributions. You should ask your provider if you’re able to contribute.
Where can I find out more?
If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.