Individual buyout policies

Individual buyout policies were used to transfer pension rights built up in a workplace scheme into an individual pension policy.

What are buyout policies?

Buyout policies were introduced in the early 1980s.

They’re used by employers and workers to transfer pension benefits built up in a workplace pension to an individual policy. This is usually after the worker has left the employer’s service or if the scheme was winding up. 

How buyout policies work

Buyout policies are individual contracts between you and the pension provider.

They’re also known as Section 32 buyout policies or s32 buyouts. The pension provider is usually an insurance company.

Many buyout policies contain a feature known as guaranteed minimum pensions (GMP). This means they often include a guaranteed payment element, as well as the investment portion.

The guaranteed minimum pension represents pension income you would have received from the State Earnings Related Pension Scheme (SERPS) – if you hadn’t contracted out through the employer’s pension scheme.

A guaranteed minimum pension gives you a guaranteed income for the rest of your life. It’s from 65 for men and 60 for women. It also provides a pension for your spouse if you die first. 

Can I make contributions into my buyout policy?

Before 6 April 2006, it wasn’t possible to contribute to a buyout policy.

This changed in 6 April 2006. But there are relatively few buyout policies that will accept contributions. Check with your provider if you’re able to contribute.

When you retire

When you retire, you usually have a choice as to how to take the money out. You can usually take 25% tax-free and then choose to get a guaranteed income, set up a flexible income, take lump sums or a combination of all.

If your pension includes a guaranteed minimum pension, then you may have to take the part that relates to this as guaranteed income. You can then you can take the part of your pension that’s not needed to provide the guaranteed minimum pension in any way you want, as described above. The amount of tax-free cash you can take may be lower than 25% though, in view of this.

If there isn’t enough in your pension when you retire to cover all of the guarantee minimum pension then the provider will make up the shortfall. In these cases, you would only normally get an income from the policy though it depends on how the pension is made up. You’re provider will make this clear to you. 

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