Understand the issues if you are in a public sector pension scheme
April 2015 is when new regulations called Pension Freedom come into play. Applicable to defined contribution pension schemes, it will allow you to withdraw funds as and when you want. The public sector however, which uses a direct benefit system for pension funds, will be unable to do so. They also only have until April to switch pension schemes, should they want to benefit from Pension Freedom.
In this post I talk about why this is, and what actions you can take should you wish to switch your pension to a defined contribution scheme.
Why Public Sector Pensions are excluded from Pension Freedom?
To understand why public sector pensions have been excluded from Pension Freedom, we need to look at the difference between a defined contribution scheme and a defined benefit (public sector) scheme.
With a defined contribution scheme, contributions from you the employee and your employer go into the pension fund. This fund is linked to the stock market, and at a suitable time you buy a pension, taking a lump sum and the rest as regular payments. The time you buy your pension is the size of your pot.
With a defined benefit or public sector pension it works a little differently. With the exception of local government employees, teachers, firefighters, police, and NHS employees have no pension fund. There pension is paid from general taxation. This is a significant burden on the state. According to the Office of National Statistics, current liabilities total £852 billion.
Although this is 58% of the UK economy, it is not a problem if it is paid out in staggered monthly payments as it was designed.
However, should you be able to withdraw sizeable chunks of cash as and when you want to from your public sector pension, and say a few thousands others did the same, then the economy would take a major hit.
According to Hargreaves Lansdowne quite a few people coming up to retirement with a defined benefit scheme are interested in switching to a defined contribution scheme to take advantage of Pension Freedom. If you were to go down this route, the Treasury would have to work out how much you were owed and transfer these funds to your new pension provider.
Although the values of defined benefit schemes tend to be better than their defined contribution counterparts, one of their disadvantages is that you do not have the control over your pension that defined contribution and Pension Freedom affords.
And it is this factor that appeals to public sector pension holders, who have expressed an interest in switching to a defined contribution scheme. If you are one of these people then you have to act before April 6th 2015. After this date you will be blocked.
Switching to a Defined Benefit Scheme from a Public Sector Pension
If you wish to switch schemes and take advantage of Pension Freedom, speak to me in the first instance. There are factors to consider but together we can look at your current pension and then explore the options to come up with the best pension for you. Click here and complete the Call Back Service Form. I am an award winning financial professional and together we can plan the best retirement for you.