BOB’s are hot…..but what are they?
It is expected that an extra quarter of a million* people will buy pension Buy Out Bonds or BOBs over the next four to five years. With approximately 1,000* defined benefit schemes in existence, those in the market think it’s realistic to expect around half, especially those that are deeply insolvent, to wind up over the next four to five years.
90% of people don’t know what a BOB or Permanent Retirement Bond is …
In a recent survey carried out by Standard Life^ it transpired that almost 9 out of ten people (88%) do not know what a pension Buy Out Bond (BOB) or permanent retirement bond is. And the reason this is a tad surprising is that it’s probable that a higher percentage actually own one.
And so you might find it useful if we set out a plain English definition of Buy Out Bonds (BOBs)…
A BOB is essentially a home for orphan pension benefits such as the pension you left behind with an old employer, or the pension you brought home from abroad or the pension that you were awarded from divorce settlement. It is a portable pension pot that you own and have complete control of once the value has transferred in. Individuals most likely to own BOBs are:
- Unlucky members of ‘bombed-out’ defined benefit pension schemes who thought they could rely on these now insolvent schemes for a comfortable retirement. Many of these have been wound up and the underlying fund value divvied up between scheme members via Buy Out Bonds
- People moving jobs. If you, a friend or family member has left or is planning to leave an employer with whom they have saved a little nest egg into a company pension scheme, BOBs are something they may want to purchase and/or need to beef up on.
An important and often useful fact is that you can access the BOB from age 50 (assuming you’ve left the employment associated with the fund). So many hard pressed individuals probably have access to immediate and tax free cash from legacy pension benefits and are simply unaware of the fact.
However there is a darker side to the BOB which is more likely to furrow the brow and this relates to the confusing treatment you get depending on whether your BOB has a Defined Benefit or a Defined Contribution heritage.
The Government have a long standing prohibition on providing ARF access to DB schemes and they insist that the integrity of this rule be maintained within the BOB environment. And until very recently BOB investors whose fund had a DC heritage got caught in the crossfire.
Standard Life played a leading role alongside industry peers and bodies in requesting changes to Revenue practice (28 May, 2014) which allow BOBs from defined contribution pension schemes to be converted into Approved Retirement Funds on retirement.
Prior to this BOBs from defined contribution schemes could only be used to buy annuities. With annuity rates at the lowest rates in decades it is great to have ARF options which allow a greater investment choice. We’re also delighted with the combined efforts of the industry and the Department of Finance in achieving these pro-consumer changes in BOB rules.
However, these regulatory changes have not also applied to defined benefit scheme members.
In conclusion, if you only have time to read a quick top 5 list of reasons to have a BOB then this is what you should know
- By having a BOB you never have to deal with your old employer again – if you leave your fund with an old employer you will eventually have to return to get the trustees to sign paperwork when you want to retire
- When you move your money to a BOB you can take a tax free lump sum at 50 years of age
- Investment choices are excellent.
- Company pension trustees do not decide what you invest in nor who receives the proceeds of your BOB in the event of your They have nothing to with the your pension pot once it is transferred to a BOB.
- 100% of Buy Out Bond value is paid to your estate on death.
*Pensions Authority annual report and accounts, 30 December, 2012. One thousand and forty defined benefit schemes exist with 527, 681 members divided by 2 equals 263,840 or over a quarter of a million people.
^A survey of 1,000 people conducted between 26 June and 4 July 2014.
Thanks to Jim Connolly, Head of Pensions, Standard Life for putting this together