POT OF GOLD
Huge pension scheme shake up could boost retirement savings for millions of workers
Plus, we reveal our top tips for how you can boost your pot
A HUGE shake up of pension schemes could boost retirement savings for millions of workers.
A new type of workplace pension, known as Collective Defined Contribution (CDC), recently launched and could soon be expanded.
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Currently, there are two main types of pensions through employers - defined benefit (DB) and defined contribution (DC).
DB pensions pay you a guaranteed income in retirement based on your salary, while with DC pensions, you build up a pot of money and then take an income from it after you stop working.
CDC pension schemes, on the other hand, are where employer and member contributions are pooled together into a collective fund and invested, with the aim of growing this pool of money over time.
Workers are then given a target pension income they will be able to take once they retire.
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Companies in the UK have been able to offer CDC pensions since 2022, when new rules gave them the go ahead, and Royal Mail this week became the first company to launch one.
Now, the scheme could be expanded so that millions more workers can take advantage after the Government launched a new consultation.
It's proposing that access should be broadened by allowing a wider range of businesses and employees to sign up.
As it stands, only single companies, or companies connected to them, can set up CDC schemes.
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But the Government wants schemes to be open to multiple, unconnected employers, making the schemes more accessible.
Minister for Pensions, Emma Reynolds, said: "We are seizing this exciting opportunity to modernise our pensions market to deliver better outcomes for millions of workers.
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"People work hard to put money aside for their pension with every pay cheque. This significant innovation will offer a more predictable income and greater finance security for future pensioners."
The consultation is calling for views from employers, industry experts, pension providers and the public on draft regulations and their potential impact.
It will run for six weeks – until November 19.
It comes after Chancellor Rachel Reeves launched a huge review of pension schemes that aims to add over £11,000 extra to a typical retirement pot.
What do the experts say?
Experts and others in the industry are being encouraged to take part in the consultation, and many see it as a positive for the UK workforce.
Nausicaa Delfas, chief executive of The Pensions Regulator, said: "Multi-employer CDC pension schemes offer the potential to deliver better outcomes for thousands of UK pension savers, turning a pension pot into a retirement income.
"I encourage industry to take part in the consultation and we look forward to working with Government to develop an appropriate regulatory regime."
Others say that the announcement of the consultation shows the current government is putting CDC schemes in the spotlight.
And David Brooks, head of policy at independent consultancy Broadstone, said: “Today’s consultation and the rhetoric from the Pensions Minister suggests CDC will be a core pension policy for the current Government.
"They seem clear that CDC could be an answer to many of the issues in the current pension system – including greater investment in the UK economy – and are looking to replace the reliance on individual DC pots with pooling of collective pots.
“However, if CDC is to gain a foothold in the UK’s pension provision, then there has to be an allowance for unconnected employers to work together. If not, CDC will remain the domain of only the very largest employers."
However, Mr Brooks pointed out that launching a new model of pension saving will likely prove a huge operational and financial challenge for smaller employers who also went through the auto-enrolment reforms in the past.
He added that there's uncertainty over how the "club" approach - where multiple employers pool together - would work in reality.
“The design, regulation and authorisation of these schemes will also need to be implemented correctly, and the current consultation will form the bedrock of this," he added.
In terms of what the shakeup could mean for workers, Steve Webb, former pensions minister and current partner at LCP, said it should be a good idea for many.
"In principle, these schemes could be good news for people who are looking for something more than an individual pot of money which they have to manage at retirement," he said.
"Similar schemes have worked reasonably well in other countries such as Netherlands, Scandinavia and Canada, though with local variations in exactly how they worked."
How does a CDC scheme differ?
Previously, workers only had two types of pensions to choose from.
DB pensions are where what you get in retirement is decided based on your salary, and you'll be paid a set amount each year on retirement.
These schemes are not usually offered to new workers any more, apart from in some public sectors such as the NHS and teaching.
DC schemes are where contributions from you and your employer are invested and then your retirement pension depends on the size of your individual final pension pot.
CDC schemes are seen as sitting between the two, but with a CDC pension, you don't get your own pot.
Instead, workers in your business will put money into a collective pot - with your employer contributing too.
This pot is shared between workers, with each employee drawing an income from this big fund when they reach retirement.
Mr Webb explained: "The idea of a collective DC scheme is that it falls somewhere between the two extremes of old-style Defined Benefit (DB) pensions where there is a hard promise and the employer has to bear all the risks, to new-style individual DC pensions where the risks around investment performance, inflation and how long you live are all on the individual."
He pointed out that in a CDC you are given a target pension figure for each year you are in the scheme, and while it’s not guaranteed, it’s what you're aiming for.
Mr Webb added: ";If everything goes well you may get a bit more. If things go badly then workers and pensioners might get a bit less. This could be, for example, lower annual inflation increases than they were expecting or even - in extreme cases - a cut in pension.
"The idea is that you do all of this collectively - this means at scale (which could improve cost-effectiveness) and by pooling risks across large numbers of members of all ages."
He also said that a particular advantage is that a CDC pension lasts as long as you do - so you don’t have to manage an individual pot in your seventies and eighties and hope it doesn’t run out.
What are the different types of pensions?
WE round-up the main types of pension and how they differ:
- Personal pension or self-invested personal pension (SIPP) - This is probably the most flexible type of pension as you can choose your own provider and how much you invest.
- Workplace pension - The Government has made it compulsory for employers to automatically enrol you in your workplace pension unless you opt out.
These so-called defined contribution (DC) pensions are usually chosen by your employer and you won't be able to change it. Minimum contributions are 8%, with employees paying 5% (1% in tax relief) and employers contributing 3%. - Final salary pension - This is also a workplace pension but here, what you get in retirement is decided based on your salary, and you'll be paid a set amount each year upon retiring. It's often referred to as a gold-plated pension or a defined benefit (DB) pension. But they're not typically offered by employers anymore.
- New state pension - This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £203.85 a week and you'll need 35 years of National Insurance contributions to get this. You also need at least ten years' worth to qualify for anything at all.
- Basic state pension - If you reach the state pension age on or before April 2016, you'll get the basic state pension. The full amount is £156.20 per week and you'll need 30 years of National Insurance contributions to get this. If you have the basic state pension you may also get a top-up from what's known as the additional or second state pension. Those who have built up National Insurance contributions under both the basic and new state pensions will get a combination of both schemes.
Can I get more cash through a CDC scheme?
In theory, you could get more money when you retire under a CDC scheme.
Hargreaves Lansdown's senior pensions and retirement analyst, Helen Morrissey, previously told The Sun that this is because workers of different ages will invest into a collective pot of money.
This allows cash to be invested in "higher risk investments that might not be otherwise possible for older workers", she said.
This is because there is a much bigger pot of money to invest, compared to your own individual pot.
The bigger the amount you invest, potentially the bigger the profit you could make - but you are in no way guaranteed a return.
"If times are tough on the stock market, or people - especially those in ill health - transfer out, then the scheme may have to reduce the income it aims to pay out," she said.
How can I sign up?
Your employer will have to set up a CDC scheme before you can apply to it.
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Employers can set themselves up with a CDC scheme if it's currently an option for them.
It's worth getting in touch with your company to see whether it is planning to offer this option or not.
Top tips to boost your pension pot
DON'T know where to start? Here are some tips from financial provider Aviva on how to get going.
- Understand where you start: Before you consider your plans for tomorrow, you'll need to understand where you stand today. Look into your current pension savings and research when you’ll be eligible for the state pension, and how much support you’ll receive.
- Take advantage of your workplace pension: All employers are legally required to provide a workplace pension. If you save, your employer will usually have to contribute too.
- Take advantage of online planning tools: Financial providers and have tools that give you an idea of what your retirement income will be based on how much you're saving.
- Find out if your workplace offers advice: Many employers offer sessions with financial advisers to help you plan for your future retirement.
Do you have a money problem that needs sorting? Get in touch by emailing [email protected].
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