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Liberation Day for Section 32s

The word is out: from 1st October SIPPs will be able to hold Protected Rights with full investment freedom.

Whilst SIPP providers prepare for the influx and insurance companies for the hit, there is one group of people to whom the 1st of October will henceforth be known as Liberation day!

This particular revolution should appeal enormously to holders of Section 32 policies who could be seen as something of a forgotten underclass in the pension world.

So who are they?

Section 32 policies may have faded into pensions history, but they were once very much part of the furniture. My colleague, Bill Barnfield, who has been in pensions for longer than he cares to remember, used to think of them as the posh end of the generally seedy transfer scene – he was so impressed that he took one out himself.

They elbowed themselves into the market long before personal pensions, and in fact they were the first vehicle that enabled transfers from schemes to individual policies. However they really came into their own with contracted out benefits.

A contracted out final salary scheme has to replace SERPS benefits with a Guaranteed Minimum Pension, or GMP. If you transferred the value of the GMP to a Personal Pension it just went into Protected Rights. However a Section 32 promised to pay exactly the same GMP as the scheme. In other words it was like committing only part of your transfer to the slings and arrows of money purchase, because the Section 32 would only use the GMP value to provide the GMP.

It all started to go wrong when the insurance companies got cold feet and, one by one, decided to remove the “ring-fencing” of the GMP portion. This meant that if the GMP fund was insufficient the rest of the funds could be raided and, as annuity costs spiralled, what often started out as a modest GMP portion grew and grew, so far from giving greater protection, continuing the GMP in its rigid format became a millstone. Section 32 became Catch 22.

Take a typically sad real life example which combines miserable performance with GMP voracity:

• Transfer value at 1.1.98: £70,000, of which £10,500 or 15% was for GMP so £59,500 wasn’t
• Policy Value at 1.1.08: £110,000, so if each had similar growth the split would be £16,500/£93,500
• In other words the policy would provide the GMP plus whatever £93,500 would buy
• However, the GMP now takes 48% of the fund!!! This is £52800, and only £57,200 is non-GMP
• So £93,500 - £57,200 = £36,300 has been siphoned off in order to prop up the GMP

(This example is taken from Bill’s Section 32 policy)

As reinstatement in the scheme is rarely an option, the only way out is to give up guarantees altogether and opt for a transfer to Protected Rights. Until now, with £billions of Protected Rights trapped in fuddy-duddy ‘safe’ funds with insurance companies and very few SIPP providers able to offer an alternative, this hasn’t been much of an attraction, but now it’s a fantastic one.

There must be 1000’s of Section 32’s that deserve immediate rescue, with disproportionate amounts of PR needing to make up for lost time and an underclass of pension holders moving away from oppressive regimes to the brave new world of self investment.

John Fox

Jul 23, 2008