I have been summarising the key changes announced in the Budget last month which relate to UK originated pension funds and in this article I want to look at another aspect, which will be my last piece on the subject to complete the trilogy!
With greater flexibility to gain access to pension fund benefits being announced, there is in fact a potential ‘sting in the tail’ for the Treasury. When people work for the armed services, police, local government, the civil service or various other occupations where government-backed pension benefits are provided, there is no ‘pot of gold’ set aside containing their money. Rather, these pension schemes are unfunded and benefits are paid from the relevant budget during the year when the benefits are due to be paid.
Where people have left service early, they have enjoyed a retained pension benefit in the main scheme and up until now, they have been able to apply for a cash equivalent transfer value to be made available to move to another pension scheme.
One of the main attractions of statutory pensions is the very basis that they are calculated on and the fact that for the vast majority of people, it would be lunacy to give up the guarantees that the schemes provide.
That was of course until last month when the chancellor made his budget announcements about being able to fully surrender pension funds with effect from April 2015. Despite the fact that the statutory schemes will still represent excellent value to most people, the option to take the full value now might just create a run on people opting to do just that.
This is where the problem could arise for the Treasury inasmuch that they would have to make available the transfer value now whereas they were not expecting to have to start to make payments until normal retirement age under the scheme.
It is for this reason that in all probability, the option to take a transfer from a statutory scheme may well in fact be removed and in some cases this may already be happening.
The question then is how long will it be before other final salary pension providers want to take the same route to avoid a run on their pension funds earlier than had been anticipated.
Whilst the new proposals work well for Defined Contribution pensions, which will include most personal pensions, they may well be about to disappear for Final Salary / Defined Benefit (DB) scheme members.
A word of caution; if you have retained benefits in a DB pension, you might be tempted to think you should rush a decision now to transfer out while you can and I can imagine there will be a number of unscrupulous advisers who will be advocating exactly that course of action. However, DB schemes have guarantees, some of which could be totally relevant to your circumstances still, which would be lost on transfer and once lost, they cannot be reinstated.