Section 32 Questions for Provider

TEC6245

Hi,

Reaching out again to this great community for some pointers... 

My husband is in the process of consolidating his smaller pensions into one fund with Vanguard ahead of him retiring early and going into drawdown to breach gap until his main pension kicks in.  Aegon have pushed back on one policy as it has a protected tax-free lump sum element which will be lost if not transferred to another Section 32 Buyout Contract.  He does not have any info on what proportion this might be, but in the latest statement it shows potential tax-free cash as the standard 25% of projected value. 

He plans to call Aegon to find out more detail, but as neither of us are very familiar with this type of plan we don’t know if loss of extra tax-free cash is only consideration, or if there are other questions he should be asking?  Aegon are recommending a financial advisor, which might be the way he goes, but given the overall policy is worth £25K the costs of doing this might be disproportionate, given other financial retirement planning is in place.  He will not have other income until main pension comes into play and plans to keep drawdown within yearly tax free limit so a reduction of tax free element might not be a major problem.

Appreciate your help on this.

dunstonh

e does not have any info on what proportion this might be, but in the latest statement it shows potential tax-free cash as the standard 25% of projected value. 

Statements show the default.  it wont be any lower than 25%.

He plans to call Aegon to find out more detail, but as neither of us are very familiar with this type of plan we don’t know if loss of extra tax-free cash is only consideration, or if there are other questions he should be asking?

Aegon will be able to give the 2006 figures to allow a calculation of the protected tax free cash.  Transitional relief following the rule changes in 2006 meant that it accrued 25% post 2006 but maintained the higher amount pre 2006.

 Aegon are recommending a financial advisor, which might be the way he goes, but given the overall policy is worth £25K the costs of doing this might be disproportionate, given other financial retirement planning is in place. 

To be honest, I would price myself out of it on purpose as it a pain in the !!!!!! transaction (one that some PI insurers require specific notifying at on renewal applications).  For such a low value and that you want to move it to a DIY provider, its not worth the liability and ongoing costs that an adviser would suffer.   In reality, as its lower than £30k, advice is not required.

Section 32 buy out bonds also frequently have GMP and GARs.  So, in addition to the protected tax free cash, he should be asking if there are GMPs, GARs or any other safeguarded benefits.      There is also the possibility of being table to take the protected tax free cash figure and transfer the pension as crystallised funds.  That option is not always available but its worth finding out.

TVAS

Yes I echo above ask Aegon if you can take the PTFC from them and transfer the residual after crystallisation.

What I do not understand is why they have not told you what the PTFC is. Depending on salary and service and provided any GMP is covered PTFC could be 100% of the fund less the amount required to secure the GMP.

A section 32 Buy Out Bond is an individual plan (the member is the owner) under occupational rules ( benefits based on salary and service. It was established in the Finance Act 1981 (Pensions nerdiness in me) 

The purpose was to protect GMP but have a punt on the stock market where you could have benefits higher than the previous scheme. How so I hear you ask. Because the definition of salary and service was based under the scheme rules whereas under under a S32 it is based on HMRC maximum salary and service and so is a more generous calculation leading to higher pension and tax free cash. 

The reason you may have PTFC is because the service related to pre 6 April 2006 where TFC changed to 25% of the fund. However this would disadvantage members such as your husband hence the introduction of PTFC.

If the above is the case (very high PTFC and the only thing left is the GMP) you could also ask if you could transfer the amount to secure the GMP to an annuity?

Lastly the provider may need information from you just in case PTFC was not calculated at time of transfer (this should have done).

They will need the last 3 years P60 to 5 April 2006 if you had basic plus P11D or bonuses or last 12 months salary so Month 12 March 2006 pay-slip if you had basic salary only. If this was not the highest salary in the 5 years leading to 5 April 2006 use the highest salary within that 5 year period.

You can contact HMRC/National Contributions Agency to get copy P60, you need to quote the tax office and reference number which you can get from the HR dept of previous employer.

I did a lot of PTFC calcs on a recent contract, I always tried to persuade people to make this effort. One woman's TFC was 25k increased to 52k because she was persuaded to make the extra effort. Eventually she thanked me for persisting with her. Let's hope it has already been calculated for your husband

TEC6245

Thank you both for taking the time to explain this - will make us much better prepared.