Unfunded public sector pensions no longer transferrable
The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material are correct as of the publication date, but since publishing the information could be out-of-date by the time you read the article. For our latest information and news, please see our articles section here.
The government announced today that people in unfunded state-backed final salary pensions will no longer be able to transfer them into private pensions. This decision may leave millions of people trapped in a pension that ultimately isn't appropriate for them, and will mean people have to predict what type of fund - and associated benefits - will be right for them years into the future.
Governments changing their mind on pensions is nothing new, for better or worse, but what many will take particular exception to this time is that the change comes on the back of measures described as "radical" to give retirees unprecedented control over their pensions. From next April, people will be able to withdraw their entire fund (subject to tax, of course) and use it as they wish. Yet while people with private pensions enjoy this flexibility, those in unfunded public sector final salary schemes will be trapped with no control over their fund, how much income they receive, nor the types of benefits they have.
Transferring out of a final salary pension is often a contentious issue, with many considering them "gold-plated pensions" thanks to the promise of an index-linked income for life. However, there are some circumstances where the cash value may be more beneficial, such as when a person has a critical illness and does not expect to live long enough to recoup that value in annual income. The benefits of many final salary schemes halve on death too, so if the owner received £20,000, the spouse would receive only £10,000, and other beneficiaries would receive nothing. On the other hand, a person with a private pension can choose to leave all of the remaining fund to beneficiaries, which is an appealing option for a lot of people. Other benefits open to private schemes include 25% tax-free cash from the age of 55 and flexibility on withdrawals.
Although this news may not sit well with a lot of people, there may be an obvious reason why the decision was made. Public sector pensions are entirely paid for by the government, and in unfunded ones, the money is not already put aside to cover them. Rather, the money is paid out as needed, and any time a cash value transfer is requested the government needs to foot the entire amount immediately rather than decades in the future. It's possible that there is a worry the new flexibility on private pensions would lead to a lot of people rushing out of these schemes, which could hit the public purse and maybe force the government to borrow more money to cover it. A cynical person could even wonder if this is a sign that the real-term benefits public sector final salaries provide are going to be reduced.
Perhaps the biggest problem with this announcement is the urgency it demands. An official date hasn't been announced yet but we expect it will be next April. That would leave only nine months before the cut-off date, and anyone wondering if a transfer would be right for them needs to consider it very seriously, and seek immediate professional advice to see if transferring is suitable for their circumstances. It also takes a while for the transfer to complete, so time is very much of the essence. Worse still, the cut-off date applies to any incomplete transfer, so it isn't enough to have the process started - if it isn't signed sealed and delivered by the deadline, the scheme remains as it was, forever.
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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new
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