Section 32 Buyout bond question

mania112

samsonite wrote: »

Yes, I do understand that I require £20k pa pension income before starting flexible drawdown. That is my reason for crystallising (if that is the correct term) part of the SIPP to buy an annuity for an income of £3555 pa and take a 25% tax free from that part of my SIPP at the same time. This will result in the combination of my state pension, various company pensions, annuity from Phoenix Life and the additional annuity purchased from my SIPP exceeding the £20k limit.

Once I have established the £20k pa pension income, I plan to crystallise the remainder of my SIPP, taking the 25% tax free. My objective is to have control of my pension pot and to extract the cash from my SIPP at a faster rate than the CM annuity would allow. Any excess income can be invested in an ISA or other investment.

To my mind my CM S32 does not have any unique benefits that I would want. These are the figures (all rounded): -

Fund value £253k
Tax free cash sum £63k
Pre 6.4.88 GMP £1082
Post 6.4.88 GMP £2659
Excess pension £3975

Total pension £7717 pa

The GMP part will increase annually, but the excess pension will be level. Therefore, I will be 85 years old before CM has paid out the £253k, assuming I make it to 85.

My alternative is to move £253k into a SIPP.

Buy annuity for an income of £3555 plus take 25% tax free - cost £71.1k for the annuity and £23.7k tax free. Are these figure correct?

Crystallise £158k
Take 25% tax free £39.5k
£118.5k remains invested in the SIPP and is under my control.
Total tax free under my alternative is £23.7K plus £39.5k = £63.2k

Is my alternative not possible?

That seems possible - question is, is it the right thing to do? You need an IFA to analysis this in more detail to be sure - you only get one chance at this and transferring away from a guaranteed pension is always risky and usually unwise.

For example you need to consider how much tax you will pay by taking larger sums of income (compared to leaving things as they are).

You also need to learn the 'critical yield' on the Clerical Medical plan. Considering the CM plan is offering you a guaranteed pension, a calculation can be made to determine how much your investments in a SIPP will need to grow by to equal/better those income levels offered by CM - will you actually be better off, even with the ability to release more income sooner in a flexible drawdown.

my best advice is to go to https://www.unbiased.co.uk and find a local IFA, there's only so much you can learn on this forum.

samsonite

I realise that tax is potentially a problem. However, with my plan I am in control and I could choose to leave the £118.5k invested for some years, only taking income when inflation has eroded my pension income. Tax thresholds will probably have increased. Alternatively, the £118.5k would provide a death benefit to my wife in the event that I pop my clogs. My wife does have pensions, including state pension in her own right, and she will also benefit from a spouses’ pension from all of my other pensions.

If I need the cash and can take the tax hit, it is probably cheaper than a bank loan or equity release.

I have run a simple spreadsheet based on the CM quote with an annual increases in the GMP portion - 2% for the pre 88 and 3% for the post 88. The CM deal will only be of benefit to me if I live beyond 85, but it provides no flexibility. I cannot be convinced that I will eventually be better off.

mania112

I wish you the best of luck, and I hope (if you are doing this without the support/opinions of an IFA) that you are comfortable with your decision before you finally make it.

One final thought, you mention that the £118.5k will provide a benefit for your wife (if you pre-decease her). You should check how that sits with your Clerical Medical plan. Section 32 is a transfer of a final salary plan (essentially) and Final Salary's commonly have a guarantee period whereby your spouse receives 100% of the pension for the length of the guarantee - before it falls to the standard 50%

samsonite

The annuity quote from CM does not mention any 100% guarantee period. It simply states a 50% pension based on the GMP for my wife in the event of my death.

Loughton_Monkey

samsonite wrote: »

.....1. I have now received my annuity quote from Phoenix Life, and it is much better than I had anticipated. The policy is currently worth £10399 and they are offering an annual pension of £1155. This is level payments, 5 year guarantee but no spouse’s pension. There are lower alternatives offered to include combinations of tax free lump sum, yearly increases and spouse’s pension with overlap. There is no GMP involved with this pension. Could I possibly improve on this offer in the open market?....

Jus a small point on this. It smacks of generous Guaranteed Interest Rates. I helped a relative with a GAR pension when he was 65, and I found that the unrealistically high guarantees also showed up in the values about when you take the pension.

In other words, in this case, the annual pension (paid annually) could have been paid in advance or in arrears. GIven that the difference between the two was about 12%, it was an absolute no-brainer to elect for payment in arrears, with no lump sum.

He didn't need the cash immediately. Had he taken annually in advance, or monthly, and put the proceeds in his best savings account, they would have accrued far less than is actually paid in 12 months.

samsonite

Thank you Loughton Monkey. The Phoenix quote is for monthly payments in advance. I have asked them to re-quote for payments 3 months in arrears, and to re-quote the death benefit for my wife (their assumptions were wrong).

samsonite

I have been re-reading the original certificate issued by CM for my S32 buyout bond and the analysis provided by the IFA who organised the transfer. Under "Fixed Benefits" there is a GMP quoted and a "Revaluation Rate" of 6.25%. According to the IFA’s covering letter this statutory guarantee will transfer to CM and the GMP will grow at this rate between the time that the S32 started and retirement. It would appear that CM have forgotten this requirement - they are quoting the original GMP figures. Have I misunderstood the purpose of revaluation rate?

phil.s_3

Hi samsonite, did you receive my message?

RalphT

I am 65 this month & have been getting quotes for a pension. My biggest fund is a Section 32 Buyout from around 1987. I have been quoted a pension based on the GMP element & an extra pension based on the surplus fund after GMP. the GMP quote includes a spouse's pension in the event of my death.

I have queried what would happen if my wife had already passed away & they still insist that they must quote for a spouse's pension.

As it happens, my wife & I are about to divorce & the fundholder has stated that even if we were divorced now, they are not allowed to quote excluding a spouse's pension, despite our plan to share my pensions through a pension sharing order.

Is this correct? It does not seem fair that I have a reduced pension & the fundholder keeps the benefit of the widow's pension if we are not married or she dies before me.

dunstonh

I have queried what would happen if my wife had already passed away & they still insist that they must quote for a spouse's pension.

The section 32 has to do that but alternative wont have to.

As it happens, my wife & I are about to divorce & the fundholder has stated that even if we were divorced now, they are not allowed to quote excluding a spouse's pension, despite our plan to share my pensions through a pension sharing order.

Is this correct?

Sounds correct.

It does not seem fair that I have a reduced pension & the fundholder keeps the benefit of the widow's pension if we are not married or she dies before me.

Have you investigated the alternatives?