A massive shake up to pensions could see millions of UK workers given another option when it comes to saving for retirement.
Launching in August, the Collective Defined Contribution (CDC) will let employers and employees pay into a collected savings pot, which is then drawn from at the point of retirement.
Even though the scheme isn’t launching until the summer, employees should find out what the change means and how it affects them now, so they can evaluate their options and decide what’s best when the time comes. Fortunately. the experts at money.co.uk have created a quick and easy guide with all the need-to-know information.
James Andrews, Senior Personal Finance Editor at money.co.uk, said: “The CDC provides a new way to save for retirement – on top of the existing Defined Benefit (DB) and Defined Contribution (DC) plans. It will see employers and employees pay into a collective savings pot shared between workers – employees will then take their share from the fund at retirement age.”
He continued: “As things stand, you either pay into an individual pot belonging to you to do with as you choose at retirement, or you are promised a percentage of your salary with your employer managing the funds (and topping them up if needed) to make this happen.”
Essentially, CDCs are a hybrid of these two approaches.
The scheme is designed to provide a balance of security and affordability by combining a reliable retirement income – based on a large pool of collected money that’s being actively topped up by current workers – but without the downsides for the company of salary-based schemes that see it forced to pay out again if market returns are not enough to meet its earlier promises.
James added: “Another benefit of CDC is the way the money can be invested for you. With an individual fund, a crash at the wrong time can see you lose huge amounts of your retirement savings. To guard against that, most defined contribution pension funds start shifting your cash into stable assets as you approach retirement.
“That makes your pot safer, but also means you miss out on potential growth towards the end.”
The shared nature of CDC means that there is no single point when it’s all cashed in – so savings can be invested for growth all the way through.
The pension also lasts your lifetime, meaning you won’t have to try and ration your savings yourself or buy an annuity with them in the same way you do when drawing on a DC pension.
However, this isn’t an option you can decide on yourself.
Much like existing workplace schemes, it’s up to your employer what type of pension they offer – that means it’s up to them whether they take the plunge into CDC and pool their staff’s savings or not.
For now, all you can do is ask them about their plans, and make sure you keep on top of any announcements.
James advises: “Before signing up to a CDC, you should evaluate the DB and DC options currently available to you.”
You can find out more about pensions on the money.co.uk website here.
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