postgresql: How to fix ERROR: new encoding (UTF8) is incompatible

Sometimes I'm unable to create a database in UTF8 encoding because the template database is in the ASCII encoding. To fix it we need to recreate template database in UTF8. Start psql console:

psql -U postgres

Run the following commands:

UPDATE pg_database SET datistemplate = FALSE WHERE datname = 'template1';

DROP DATABASE template1;

CREATE DATABASE template1 WITH TEMPLATE = template0 ENCODING = 'UNICODE';

UPDATE pg_database SET datistemplate = TRUE WHERE datname = 'template1';

\c template1

VACUUM FREEZE;