Minister Steve Webb plans to introduce a new type of pension aimed to help boost income in retirement.
Table of contents
Webb’s continual tweaking of the pension system has seen the roll–out of several new features.
The latest is ‘collective defined contributions’ (CDC).
The idea is investors pool part of their pension funds in an investment fund instead of an annuity.
While the annuity pays a guaranteed income for life, the CDC pays a monthly pension based on the performance of the underlying funds, so can go up and down depending on the markets.
Payments boosted by a third
CDC pensions are popular in The Netherlands and Denmark.
A recent study by pension provider RSA modelled CDC fund performance over 57 years. The surprise results revealed that CDC pension income was a third up on payments from a standard scheme and provided ‘predictable’ income.
The findings are disputed by another pension provider, Aviva, and some Dutch providers have had to reduce CDC pay outs as the investments performed less well than expected.
Webb’s other pension initiatives include a cap of fees for auto-enrolled scheme and the chance for pensioners to top-up their state pension by up to £25 a week by buying extra qualifying years if they have missed out on the full payment.
Meanwhile, annuity rates that plummeted to rock-bottom following the credit crisis have clawed back 13% of their value in the past year, according to provider MGM Advantage.
Pension cap threatened
A man retiring at 65 years old in 2013 investing £50,000 in an annuity gained an extra £7,560 income over their retirement compared to someone the same age investing the same sum a year earlier.
“Increased competition between providers, better returns on investments and confidence in the market have all had their affect after some years of volatility and uncertainty,” said a spokesman for the firm.
The provider also pointed out the benefit of shopping around for a value for money annuity.
The best annuities offered £9,555 or 17% more income over retirement, while an enhanced annuity returned an extra £14,616 through retirement, or a 24% improvement on the worst paying product.
Looking forward to the next general election, the Lib-Dems have hinted that their manifesto is likely to include lowering the annual lifetime allowance on pension savings to £1 million.
The cap is due to slip down from £1.5 million to £1.25 million on April 6.
Related Articles, Guides and Insights
Below is a list of some related articles, guides and insights that you may find of interest.
Questions or Comments?
We love to get feedback from our readers. So, after reading this article, if you have any questions or want to make comments, send us a message on this site or our social media?
Don’t forget that you can also request the guides sent directly to your email inbox.