Should I stay or should I go has been a constant question in the minds of well-advised members of final-salary schemes for years. So the idea that some senior public servants could be better off out of their final-salary scheme than staying in can only make cashing in more attractive.
It goes without saying that the new flexible drawdown regime should prove attractive to those with big defined-benefit pensions. Many of those on course for an income-rich, cash-poor retirement will doubtless welcome the freedom to go for big capital projects soon after they stop working.
Now we have the situation reported in Money Marketing last month that some high earning doctors still accruing benefits could be better off out of their pension scheme than in. This is because the combined effects of increased employee contributions, the new £50,000 annual allowance charge and next April’s reduced lifetime allowance mean that for some, admittedly only a handful, the benefits are being outweighed by the costs. The clearest cases are those very close to retirement, where staying in a scheme past April 2012 will mean falling foul of the new £1.5m lifetime limit rather than benefiting from £1.8m by leaving before then. On paper, the numbers I have seen show the client better off by leaving rather than staying.
For advisers, however, committing a recommendation to leave the NHS scheme to paper is a big step.
The trimming of the lifetime allowance creates a one-off problem for those close to retirement but even some high earners in their forties and fifties will be starting to wonder how much benefit they are accruing from being in schemes.
Many will already be on course to hit the new lifetime limit before they retire and some are likely to break the annual allowance at some stage.
The fact that you have to leave a scheme to get a transfer out of it has been a key impediment to public sector high earners taking advantage of the flexibility of defined-contribution pensions. But the more tax and contributions eat into what high earners get back in return, the easier that decision becomes.
Transferring out of public sector schemes sounds fanciful but several IFAs and providers I have spoken to in recent months have come across situations where the numbers are at least being looked at. How many of these will go through to completion remains to be seen but I bet some of those requesting transfer valuations now are wishing they had done so before last winter’s indexation change. For those that stay put, nagging questions over how else the government might move the goalposts will persist.
Many schemes do not let members transfer out in the year before retirement but will we start to see transfers in the year before that? Those running funded schemes will be hoping not. As for those in the private sector, the risk posed by trusting the entirety of your pension saving above the Pension Protection Fund level on fortunes of a single company remains – as the recent Silentnight scheme furor reminds us.
Of course there are many variables. Will the lifetime allowance start to go up again in future? Will annuity rates go down? When it comes to pensions, nothing is set in stone. But for some well-pensioned public servants, flexibility will be what makes their retirement dreams come true. Flexible drawdown makes transferring out of gold-plated schemes seem a whole lot more attractive.
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