Buy-out Bonds

M

Montbretia

Registered User
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Hi all,
My wife and I both have Group Pensions with Aviva through our company and which are 'frozen' and are not going to be contributed to again. A financial adviser has informed us that we would be wise to transfer these funds into buy-out bonds immediately as he states that if either of us dies, the surviving partner would only receive 4 x final salary of the deceased, and not the whole pension fund sum. In the case of a buy-out bond, the surviving partner would inherit all of the fund, tax-free, he states. Does this appear the no-brainer that the FA suggests?
 
Hi Montbretia, if you are both still in employment with the same employer who provided the Group pension then as an Occupational Pension Scheme, the death in service rules of 4 times final salary as a tax free lump sum and the balance of any fund used to purchase an annuity is correct. This is only for employer contributions and any employee or AVC contributions are paid out as a lump sum in addition to above lump sum. If there is a Death in Service risk cover in place as well then you dont get the 4 times salary twice, you only get it once.
If you have left employment with that employer then as a preserved benefit it is all paid out to the estate.
There are other pros and cons to moving to a Buy out Bond (BOB) but if the forced purchase of an annuity is your main concern then check the following;
  • After deducting avcs/employee contributions and 4 times final salary ( assuming no death in service life cover) what amount is left that will end up in a compulsory annuity for you both?
  • If you do have death in service life cover then re run the above calculations only adjusting for employee/avc contributions
  • Was the original scheme a defined benefit scheme? If so you will under current rules be forced to buy an annuity with your BOB fund at retirement. If the scheme is a defined contribution then you have the Approved Retirement Fund (ARF) option which provides inheritability for future generations. If it was defined benefit, many in the industry expect the rules to be changed to allow the ARF option in the near future. It might be worthwhile holding off in the short term to see if this rule is changed.

In the end if you conclude that a BOB is your preferred route, then get competing recommendations and quotes as its the best and perhaps only way to get proper transparency and price discovery. In addition you will be able to get a more balanced anlysis of the pros and cons of any proposed move to a BOB. I hope that helps. All the best Vincent
 
North Star said:
Hi Montbretia, if you are both still in employment with the same employer who provided the Group pension then as an Occupational Pension Scheme, the death in service rules of 4 times final salary as a tax free lump sum and the balance of any fund used to purchase an annuity is correct. This is only for employer contributions and any employee or AVC contributions are paid out as a lump sum in addition to above lump sum. If there is a Death in Service risk cover in place as well then you dont get the 4 times salary twice, you only get it once.
If you have left employment with that employer then as a preserved benefit it is all paid out to the estate.
There are other pros and cons to moving to a Buy out Bond (BOB) but if the forced purchase of an annuity is your main concern then check the following;
  • After deducting avcs/employee contributions and 4 times final salary ( assuming no death in service life cover) what amount is left that will end up in a compulsory annuity for you both?
  • If you do have death in service life cover then re run the above calculations only adjusting for employee/avc contributions
  • Was the original scheme a defined benefit scheme? If so you will under current rules be forced to buy an annuity with your BOB fund at retirement. If the scheme is a defined contribution then you have the Approved Retirement Fund (ARF) option which provides inheritability for future generations. If it was defined benefit, many in the industry expect the rules to be changed to allow the ARF option in the near future. It might be worthwhile holding off in the short term to see if this rule is changed.

In the end if you conclude that a BOB is your preferred route, then get competing recommendations and quotes as its the best and perhaps only way to get proper transparency and price discovery. In addition you will be able to get a more balanced anlysis of the pros and cons of any proposed move to a BOB. I hope that helps. All the best Vincent
Click to expand...
Thanks for that Vincent.
My wife is no longer in employment with the company though she remains a director. The contributions are solely employers contributions. It is a defined contribution scheme. Her final years salaries were small so the 4 x final salary would not amount to much hence our concerns.
 
Hi again Montbretia,
I suspect as your wife is no longer in employment that she will be treated as having a preserved benefit, i.e. no forced annuity purchase however I would need all the details before being sure on this. If you are clearly in the forced annuity purchase situation then the BOB is worth considering subject to my final point above. One additional benefit of the BOB is that the benefits can be drawn from age 50 in case that is of any benefit for your particular situation. All the best Vincent
 
Picking up this threat again after a summer's pondering. My FA tells me he charges a 0.25% annual fee for the Buy Out Bond, on top of the 0.9% management fee for the fund under consideration (Aviva Cautious Multi Asset Fund) for my wife. Is this the going rate? I presume, as the BOB is a personal retirement bond then the need for a broker and his charges is not a necessity and it can be handled by the individual with no third party costs, though with no advice.
 
It depends. When we have assets under management, the levies that we have to pay goes up as well as our indemnity insurance. That is a cost we have to cover each year. Then there is the ongoing advice. Clients like to say that they don't need any but they always do. Do you want you advisor to charge you every time you pick up the phone to him?

Some years you will use him more often than others but at least you know the clock isn't ticking. If you want, you can agree an annual fee with him?


While people question the cost of our ongoing fee (who will you contact with a problem?), people accept the insurance companies fee without question. They are charging over 3 times as much.

I would say 0.9% is expensive for the product. I presume your advisors commission is being recouped from that 0.9%?


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
SBarrett said:
It depends. When we have assets under management, the levies that we have to pay goes up as well as our indemnity insurance. That is a cost we have to cover each year. Then there is the ongoing advice. Clients like to say that they don't need any but they always do. Do you want you advisor to charge you every time you pick up the phone to him?

Some years you will use him more often than others but at least you know the clock isn't ticking. If you want, you can agree an annual fee with him?


While people question the cost of our ongoing fee (who will you contact with a problem?), people accept the insurance companies fee without question. They are charging over 3 times as much.

I would say 0.9% is expensive for the product. I presume your advisors commission is being recouped from that 0.9%?


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
Click to expand...

Thanks Steven,

The advisors fee is in addition to the annual 0.9% fee for the product.
 
Apologies if I am getting this wrong.

Under the product that you are going into, there is a gross allocation rate of 102%. I am presuming that the broker is taking 2% as his initial set up fee and you wife gets 100% of her money invested.

That 2% he gets paid is recouped by Aviva through their annual management fee. If there was no additional 2% allocation, the management fee would be about 0.65% (you pay extra for the fund that your wife has gone into). If it is a short period to retirement, it may work out cheaper for your wife to get the insurance company to pay his fees. If it is a longer term, the higher amc will work out more expensive.

The fund your wife has chosen is expensive.

As to him also getting an additional 0.25% on top of the 0.9% each year, I take an obviously biased view on the matter but he has to provide you with a service to justify it.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
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