Could recent pension changes boost your retirement income?
Is there finally some good news following the recent pensions update in the UK? There may be.
A new type of scheme is expected to later be opened up to millions of workers in various industries. In essence, these Dutch-style retirement plans let savers pool risks and grant them more stability. The scheme could boost retirement income by up to seven per cent a year.
As of now, this innovative pension scheme is being used in Denmark and the Netherlands, two countries that are known globally for some of the best pension systems.
How does it work?
Final salary pensions are a growing concern for employers as they struggle to manage massive deficits in the schemes. On the other hand, savings through individual contribution pots are rising but investors bear certain risks and may not have enough certainty about their retirement income’s well-being.
On top of this, savers will need to make decisions about how they want to withdraw their money on retirement. Will they buy a costly annuity that provides guaranteed income? Will they work out their life expectancy and opt to draw down payments from individual pension pots?
This new pension scheme, known as the Collective Defined Contribution (CDC) scheme will function as a middle ground of sorts where members can share risks by placing their cash into one fund instead of relying on individual pots.
The obvious upside of such a plan comes from the ability to share risk which, in turn, can potentially deliver higher returns for investors. In addition, this paternalistic structure could require minimal engagement from each member of the scheme.
In a nutshell, this seems like an easier and much safer road towards better retirement situations, possibly leading to a bigger final income for about the same cost as conventional schemes.
Another key difference is that savers could remain practically unaffected if their employers ever go bust (a fear that members of final salary schemes have to live with).
According to the Commons Work and Pensions committee, CDCs could let organisations offer their people good pension deals without the substantial risk of large long-term pension liabilities on their track record. Workers are given a regular income in retirement and employers can breathe a little better with a reduction in pension problems.
Is there anything to worry about?
CDCs may be a great pension option but there are some things that interested parties should consider. The Government has stated that changes in the economic landscape are still relevant to holders of CDCs. This could lead to payment cuts or increased contributions.
Members’ monthly pensions may or may not fluctuate in value, according to the market and overall economic health.
What do you think about this new and potentially more effective way of building your retirement wealth? It may be too soon to tell but CDCs are positioned to possibly deal with the barrage of pension problems the UK has been facing lately. Get in touch with my team to book yourself a chat session to discuss your options with me.