Scottish Equitable Section 32 Buyout - Non Reserved Fund Value

davethebb

I am 57 yrs old and have a section 32 Buyout which has a current reserved fund value of £9,782 with a guaranteed pension of £3,160 when I turn 65. I will not, therefore, be touching this until I am 65.

The current non-reserved fund value is currently £15,141 but they project when I am 65 it will be £16,306 and could give me an annual pension of £997. I am assuming that this is payable when I am 65 and not when I take my state pension.

The reason for posting is I would like to understand the following. They seem to gear the non-reserved pension income at a rate of 5.9% of the fund value when I am 65 so why do they use this rate and will the rate fluctuate between now and 65 and after I am 65? Secondly, will the non-reserved funds still be invested and subject to market fluctuations and thus my income as well?

xylophone

Have a look at the description of the SE (Aegon) S32 here (under Background information)

https://www.pensions-ombudsman.org.uk/sites/default/files/decisions/CAS-30344-V3B5.pdf

Is your policy of this type?

dunstonh

The reason for posting is I would like to understand the following. They seem to gear the non-reserved pension income at a rate of 5.9% of the fund value when I am 65 so why do they use this rate and will the rate fluctuate between now and 65 and after I am 65? 

Assumptions used are synthetic and the rules about the figures to use are set by the regulator.   The rate you get will depend on the rates available at the time unless a guarantee exists that makes them higher.

davethebb

Xylophone, Yes it is a Scottish equitable Individual Pension Policy and it started on the 14th of June 1994. The amount transferred at the start was £3,997.44 and they had to guarantee a pension of £276.64 which seems to be revalued at 7% annually to reach the £3,160.32 pension at retirement. For this, they allocated £1,938.80 into a "With Profits" Endowment fund - this they refer to as the reserved fund.

The remaining (non-reserved) was invested in a technology fund and is valued at £15,141. I have read the policy documentation and it doesn't state anywhere that if the reserved units are not sufficient they will use the non-reserved fund as a top-up. Does this sound right for a policy taken out in 1994? if it doesn't I will re-read the policy documents and double-check later.

xylophone

14th of June 1994. The amount transferred at the start was £3,997.44 and they had to guarantee a pension of £276.64 which seems to be revalued at 7% annually to reach the £3,160.32 pension at retirement. For this, they allocated £1,938.80 into a "With Profits" Endowment fund - this they refer to as the reserved fund.

You were a member of an occupational pension scheme which was contracted out of Additional State Pension - in order to be able to contract out, it had to promise to pay (at GMP age, 60F/65M) a pension at least equal to the pension you would have received had you remained contracted in to ASP.

When your pension was transferred to a S32 with SE (Aegon) in 1994, you were still entitled to a GMP at age 65 - within the S32, the GMP is revaluing  in deferment on the Fixed Rate basis - see under  "GMP revaluation" here https://www.barnett-waddingham.co.uk/comment-insight/blog/what-is-a-gmp/.

In order to meet this obligation, SE set aside a portion of the funds transferred to them and placed it in a WPE which it was hoped /expected to grow sufficiently to meet the GMP obligation at age 65.

The balance was invested in the hope/expectation of offering additional benefits  at retirement.

Aegon must pay a pension at least equal to the GMP at age 65 and presumably once in payment, must pay an annual increase of up to 3% on any part of your GMP accrued post 5.4.88.

You should read your policy carefully to determine whether or not any part of the non reserved fund may be used to top up the reserved fund to meet the GMP obligation.

Otherwise you may have certain choices as to how to use the non reserved fund.

See https://www.financialadvice.net/s32_buy_out_plan/zone/1288

davethebb

Thank you Xylophone & Dunstoh. 
I have re-read all the policy paperwork and can't see anything regarding using the non-reserved unit if there is a shortfall in the Reserved fund so I have messaged AEGON to see what they come back with. I will let you know.

davethebb

Aegon has responded but avoided answering my question about what happens if there is a shortfall in the reserved units so I will ask again.

Their response has thrown up another question. They say "Please note that GMP annuity will be provided by our partner Legal and General. Full annuity basis is as follows:

- Monthly in advance (for pre 88 and post 88)
- Guarantee period is 5 years (for pre 88 and post 88) with overlap
- No escalation (for pre 88)
- RPI (0,3) (for post 88)
- 0% spouse benefit for female (pre 88)

My concern regards the "Guarantee period is 5 years......." as I thought the Section 32 was undertaken to replace the part of the state pension I sub-contracted out of many years ago and would therefore be paid during my full retirement and not just for five years.

Is my understanding correct?

dunstonh

My concern regards the "Guarantee period is 5 years......." as I thought the Section 32 was undertaken to replace the part of the state pension I sub-contracted out of many years ago and would therefore be paid during my full retirement and not just for five years.

The 5 year is the minimum. i.e. die in the first year and it will continue to pay for another 4 years.

davethebb

Dunstonh, Thank you. That makes perfect sense now you have said it.

davethebb

I have now had confirmation from Aegon that the non-reserved units will not be used if there is a shortfall in the reserved units at the time I take the pension ( at 65 years old - 8 years time). Therefore the non-reserved units appear to be an added bonus.

Going back to my original question the current non-reserved fund value is currently £15,141 but they project when I am 65 it will be £16,306 and could give me an annual pension of £997 which equals a rate of 6.1%. Firstly how do they determine the rate of pension for the non-reserved units; secondly will the reserved unit value fluctuate with the markets (it is invested in a Tech fund) or will it be converted to an annuity when I start to take it in 8 years time?

xylophone

Firstly how do they determine the rate of pension for the non-reserved units; 

Surely these would have a value at age 65 and it is that value that would determine how much annual pension it would buy, presumably based on annuity at that time?

There might also be the possibility of tax free cash?

secondly will the reserved unit value fluctuate with the markets (it is invested in a Tech fund) 

Presumably it would but as this seems to be endowment related, there would already be bonuses which could not be taken away?

And at all events, it must provide at least the revalued GMP.

You might find this of interest

https://www.moneymarketing.co.uk/analysis/hold-fire-on-pensions/