What is a public sector pension and do I have one?
Those who work in the public sector, typically, NHS staff, police, firefighters, teachers, lecturers, the armed forces and many other public sector workers are generally members of a defined benefit (or final salary) scheme. You may not be a public sector employee but still retain a defined benefit pension.
Defined benefit pensions vary from the average workplace pension and offer greater guarantees.
If you’re a public sector worker with a defined benefit pension scheme
A defined benefit (DB) pension doesn’t depend on a saved pot of money. How much you receive will depend on your pensionable service (how long you’ve been a member of the scheme, days, weeks months an years), your pensionable earnings (either your salary at retirement, or your average salary over the period of your membership) and the scheme’s accrual rate (the proportion of your salary you receive as pension for each year of service). A typical accrual rate might be 1/80, which means that if you spend 30 years in the scheme, your DB pension would pay you 30/80 (i.e. a quarter) of your final salary. So in this scenario, if you retired on a salary of £40,000 then you’d receive £15,000 a year for the rest of your life and a tax-free lump sum of £45,000, equivalent to three times your pension. (30/80 x 40 = 15 x 3 = 45)
In some schemes, taking a lump sum may reduce your annual income, but a lot of public sector pension schemes pay an automatic lump sum in addition to your annual income.
Can I transfer my pension under “pension freedoms”?
As far as the regulator (the FCA) is concerned there would be no good reason to transfer away from such a scheme, as the guarantees offered under a DB scheme are near impossible to replicate in a defined contribution (DC) environment. But it does depends on the kind of DB pension you have. Some schemes (such as the Local Government Pension Scheme or private-sector schemes) are known as funded schemes, because they are supported by a central fund. If you really want to, you can transfer out of these DB schemes. Your pension is then moved into a DC scheme, the size of which would be determined by your pension’s transfer value. But given the regulators beliefs you should consider the significant guarantees offered under a DB scheme. Be aware that this value may be significantly less than you would have received over your retirement if you had remained in the DB scheme – the advantage would be that you could access it in a variety of different ways, even all at once.
So what about NHS staff, firefighters, teachers, police etc?
Many public sector pensions are ‘unfunded’ schemes – that is, there is no central fund, and they are paid for only by the taxpayer, although members generally make a contributions also. The pensions of NHS staff, firefighters, teachers, the police and the armed forces all fall into this category. This means it’s not possible to transfer from this kind of pension into a DC scheme. So you may not have the same flexibility, but you do have the reassurance of a generous guaranteed income for your life and sometimes that of your spouse.