Would you like expert advice on a financial problem? Here, former UK pensions minister Steve Webb responds to a question about a blocked pension transfer.
Pension transfer blocked
The increase in the number of final salary pension transfers has been featured in the recent May and June issues of your excellent magazine. Both articles examine an increasingly popular view, following the pension freedoms of 2015, that defined benefit pensions may no longer be the best option.
One consideration is that the cash value of final salary products have had to rise to generate the benefits promised, and this has led to generous transfer valuations.
Second, as the June issue rightly points out, moving to a defined contribution scheme offers legacy advantages, as the pension pot can be passed on and does not end with the death of you and your spouse.
Then, there’s the issue of suitability concerning some of the non-negotiable ‘benefits’. For example, not everyone has need for a spouse half-pension in the event of their death, but there is no facility to opt out.
These considerations were behind my application to transfer my own small deferred NHS final salary entitlement a year or so ago. However, members of public service defined benefit scheme are prevented from doing so.
Even though my decision was taken with the benefit of discussions and advice from my IFA, NHS Pensions refused to transfer my entitlement, stating that from 6 April 2015, it is no longer possible to transfer out of public service schemes into defined contribution schemes.
I recognise that there is a duty for the scheme and/or the chancellor to ensure members do not surrender a valuable retirement benefit, but in the May issue, Steve Webb concedes that for some people a transfer makes sense.
I feel that in instances where professional advice has made a good case, the best option for an individual is being denied unnecessarily. Is there any way of challenging this universal restriction on transfers out of public service defined benefit schemes?”
David Aspin, by email
Steve Webb replies: The issue is that most of the main public sector schemes (teachers, NHS, civil service) are ‘unfunded’: there’s no pension fund, simply a set of promises that future generations will pay you a pension.
Before pension freedoms, some transfers out happened, but they were rare. After pension freedoms, the government was concerned that there would be large-scale transfers out. This would have involved the government bringing forward future pension costs to the present to fund the transfer value.
So it was decided that transfers out would not be allowed from unfunded public service schemes. The government would not want to allow significant up-front expenditure of this sort.
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