Pensions and Annuities Ltd

Guaranteed Minimum Pensions and Section 32 (Buy Out Bonds)

Guaranteed Minimum Pensions (GMPs) held within a Section 32 policy, also known as a Buy Out Bond, are still surprisingly common. But what exactly are they, and why do they matter?

A Section 32 contract was something you may have taken out in the 1980s or 1990s, usually after transferring benefits from an existing pension scheme — often a final salary pension — into a policy specifically designed to hold GMP. These contracts were widely offered by insurance companies at the time, and some providers still manage them today, such as ReAssure, Aegon, Royal London, and Phoenix Wealth, among others.

The idea behind these arrangements was fairly straightforward: by transferring out, you would retain your GMP but also hold an invested pot of money. With strong investment growth and lower annuity rates (as was expected at the time), the hope was that your transferred pot would eventually be worth more than simply leaving your pension in the original final salary scheme.

Unfortunately, the reality has often been very different. Many of these policies were invested in so-called “with profits” funds, which didn’t deliver the growth that had been anticipated. As a result, many people are left with a relatively modest pension pot alongside the GMP obligation.

Here’s where things get tricky:
Section 32 contracts are bound by rules that require the GMP to be secured first — using the money in your pot. Only whatever is left over after covering the GMP can then be used for other purposes, such as taking tax-free cash.

For example:

• If your GMP is worth £3,000 a year, the cost of securing it could be £60,000.

• If your pension pot is £60,500, then you’d only have £500 left available — meaning just £500 of tax-free cash.

Compare this with transferring out to a personal pension:

• On a pot worth £60,500, you could typically take 25% tax-free cash, which in this example would be £15,125.

That’s a big difference.

However, there’s an important catch. To transfer out of a Section 32, your pension pot has to be worth more than the cost of the GMP. Using the same example, if your GMP costs £80,000 to secure but your pot is only worth £60,000, you wouldn’t be able to transfer — no matter how restrictive the arrangement feels.