Section 32 buy-out plans explained

A section 32 buy-out plan is an individual insurance policy that holds pension rights taken out of a former employer's occupational pension scheme, often a final salary scheme. Many section 32 plans carry guarantees, such as a Guaranteed Minimum Pension (GMP) or a guaranteed annuity rate, which can be valuable and are easy to lose by transferring.

What is a section 32 plan?

When you leave an employer's pension scheme before retirement, your benefits don't disappear. Usually they stay in the scheme as a deferred pension, or you can transfer them elsewhere. Another route, which was common in the past, was for the scheme trustees to "buy out" your benefits by buying an individual insurance policy in your name. That policy is a section 32 plan, sometimes called a section 32 buy-out bond or buy-out policy.

The name comes from section 32 of the Finance Act 1981, which allowed these policies and has since been repealed (LexisNexis). It is a deferred annuity contract: an insurance policy that secures your pension benefits, but doesn't start paying them until you reach retirement age. You'll still see the name on policy documents and statements today.

Trustees used section 32 plans for different reasons. Sometimes a member chose one when leaving. Sometimes trustees used them to settle their responsibility for members' benefits, for example when a scheme was winding up. Once the policy is bought, the insurance company, not the old scheme, is responsible for paying your benefits.

Why section 32 plans can be complicated

A section 32 plan sits between two worlds. It was bought with money from an occupational scheme, which may have been a final salary scheme, but it is held as an individual insurance policy. Depending on how it was set up, it may look like a defined contribution pot with a fund value, or it may promise a fixed level of pension. Many are a mix of the two.

That's why two people who both say "I have a section 32" can have very different plans. What matters is what your policy actually promises.

GMP inside a section 32

If your old scheme was a final salary scheme that was contracted out of SERPS between 6 April 1978 and 5 April 1997, part of your pension may be a Guaranteed Minimum Pension (GMP). Our guide to SERPS and contracting out explains where GMPs came from.

The law allowed trustees to pass on their responsibility for GMPs by buying an insurance policy or annuity contract, as long as the GMPs were properly secured (section 19 of the Pension Schemes Act 1993). Many section 32 plans were used in this way. In practice, that means:

• The GMP is a guarantee. The policy must provide at least the GMP from GMP age, which is 65 for men and 60 for women. If the fund isn't big enough, the insurer has to make up the difference.
• It can limit what else you can do. Because the insurer must hold back enough money to provide the GMP, you may have less flexibility before GMP age, and there may be less than the usual 25% available as tax-free cash. Our GMP guide gives an illustrative example.
• It can include a survivor's pension. GMP rules also provide for a pension for a surviving spouse or civil partner.

Not every section 32 has a GMP. If you left your scheme before 1978, or your scheme wasn't contracted out, or you only had later service, there may be no GMP at all. Later contracted-out service, from 1997 to 2016, built up section 9(2B) rights instead.

Other guarantees you might have

As well as a GMP, a section 32 plan may include:

• A guaranteed annuity rate. Some section 32 plans promise to turn the fund into an income at a fixed rate. Our guide to guaranteed annuity rates explains how these work and the conditions that often apply.
• Protected tax-free cash. Some people had a right to more than 25% tax-free cash on 5 April 2006. HMRC's rules on scheme-specific lump sum protection can cover deferred annuity contracts like section 32 plans, but the protection is usually lost on a transfer unless it is part of a block transfer (HMRC Pensions Tax Manual, PTM063130).
• A protected pension age. Some older schemes gave a right to take benefits before today's minimum pension age, which is 55 now and rising to 57 on 6 April 2028. That protection can also be lost on a transfer (PTM062205).
• With-profits terms. If the plan is invested in with-profits, there may be guaranteed bonuses and a market value reduction if you leave at certain times.
• Fixed pension increases or other scheme-style benefits that were copied across from the original scheme.

Each of these depends entirely on the wording of your own policy.

Transferring a section 32: when advice is required

You can usually transfer a section 32 plan to another pension, such as a personal pension or drawdown. Whether you should is a different question, and the answer depends on what you would give up.

Benefits with guarantees attached, such as a GMP that the insurer must pay or a guaranteed annuity rate, are generally safeguarded benefits. Under section 48 of the Pension Schemes Act 2015, safeguarded benefits are any benefits other than money purchase and cash balance benefits. Your provider can confirm whether your plan contains them.

If it does:

• Advice is required over £30,000. If your safeguarded benefits are worth more than £30,000, the provider must check that you have taken regulated advice before it can transfer them to a pension without those guarantees. The value for this test is the transfer value.
• The FCA starting assumption applies. Under the FCA's rules (COBS 19.1.6G), an adviser should start by assuming that a transfer or conversion of safeguarded benefits will not be suitable for most people, and should only recommend it if they can clearly show it is in your best interests. The FCA's pension transfer page explains more.

Our guide to safeguarded benefits sets out the rules in more detail.

If your section 32 has no guarantees at all, it may be a straightforward money purchase plan, and no advice is legally required to move it. It is still worth checking the charges, any exit penalties and what you might give up before you decide.

Be cautious of anyone who contacts you out of the blue about moving an old pension, or who promises better returns elsewhere. Check the FCA ScamSmart site before dealing with any firm.

How to check your section 32 plan

Your annual statement may only show a fund value, which can hide the guarantees underneath. Write to your provider and ask:

1. Is this a section 32 buy-out policy, and which scheme did the money come from?
2. Does the policy include a GMP? If so, what is the GMP at GMP age, and is there a survivor's GMP?
3. Is the fund currently enough to provide the GMP, or is the insurer making up a shortfall?
4. Does the policy have a guaranteed annuity rate or any other guarantee?
5. How much tax-free cash could I take, and is any of it protected above 25%?
6. Do I have a protected pension age under this policy?
7. What is the transfer value, and is there a market value reduction or exit charge?
8. Does the policy contain safeguarded benefits, and if so, what is their value for the £30,000 advice test?

If you can't trace the provider, the government's Pension Tracing Service can help you find contact details.

Where to get help

For free, impartial guidance, contact MoneyHelper. If you're 50 or over and your section 32 is a defined contribution plan, you can book a free Pension Wise appointment.

If your section 32 has a guaranteed annuity rate, I can advise on it directly through Arthur Browns Wealth Management Ltd, subject to suitability; advice is chargeable. For other safeguarded benefits, such as a GMP, regulated advice must come from an FCA-authorised firm with the right permission. I don't give that advice, but I'm happy to explain how the process works in a free, no-advice chat, and if you want regulated advice on a transfer value of £50,000 or more, I can introduce you to an FCA-authorised firm that holds the pension transfer permission. Our how it works page explains more.

Frequently asked questions

What is a section 32 pension?

It is an individual insurance policy that holds pension rights bought out of a former employer's occupational scheme. The name comes from section 32 of the Finance Act 1981. Many contain guarantees, such as a GMP, carried over from the original scheme.

Is a section 32 a defined benefit pension?

Not exactly. It is an insurance policy, and many have a fund value like a defined contribution pension. But many also carry defined benefit-style guarantees, such as a GMP, which the insurer must pay. That mix is why it is important to check exactly what yours promises.

Can I transfer my section 32 to a SIPP or personal pension?

Usually yes, but you may lose valuable guarantees. If the plan has safeguarded benefits worth more than £30,000, the law requires you to take regulated advice before you can transfer.

Why is my section 32 tax-free cash less than 25%?

If the plan includes a GMP, the insurer must keep back enough money to pay it. If the fund hasn't grown enough, that can leave less than 25% available as tax-free cash. Ask your provider how the figure is worked out.

Does my section 32 have a guaranteed annuity rate?

Some do. Ask your provider in writing whether the policy includes a GAR or any other guaranteed income terms, and on what conditions.

If you'd like to understand how transfers of guaranteed benefits and the advice process work, book a free, no-advice chat. It is general information, not advice.