Pensions  

CDCs could solve freedoms issue

CDCs could solve freedoms issue

We know all is not well with pension freedoms when the latest Financial Conduct Authority Data Bulletin, published in September 2018, tells us that more than half (51 per cent) of all pension pots accessed for the first time between October 2017 and March 2018 were fully cashed in.

And most of the resulting savings end up in personal bank or building society accounts offering low interest rates.

How will the ex-holders of the 757,927 pensions so far fully cashed in since pension freedoms fare 15 years from now, particularly those who seized control over seemingly life-changing amounts of money from large defined benefit pots?

Only time will tell, but without sound budgeting, even the largest lottery winners can end up penniless.

However, recently one strong bright light in the otherwise gloomy pensions savings tunnel shone through in the shape of collective defined contribution pensions.

Indeed, Amber Ruddthe former secretary of state for work and pensions, has backed plans for the first CDC scheme in the UK for Royal Mail workers.

The CDC offers a clear alternative to the super individualistic, ‘every man for himself’ mantra that pension freedoms is shot through with.

Instead, CDCs promise the economies of scale that come with bringing thousands of workers’ pensions savings into a single trustee-managed scheme.

Key Points

  • More than half of pension pots accessed between October 2017 and March 2018 were fully cashed in
  • CDC schemes have been suggested as an option for pensions
  • CDC decumulation offers a regular wage in retirement

The benefits of CDCs are evident: members get a clear picture of what pension to expect, with regular payouts from their scheme.

And unlike traditional final salary pension schemes, those payouts are not affected if your employer goes under. Furthermore, you cannot over-draw on your pot unlike income drawdown policy holders.

The first priority is to deliver on the agreement reached between management and unions at Royal Mail.

As soon as the Royal Mail CDC scheme is operational and the threat of a postal strike over pensions is averted, the government will be able to open up the exciting new world of CDC schemes to other players.

Helping with budgets

The great thing about CDC-based decumulation is that it delivers a fairly regular wage in retirement – something most of us have become used to in our working lives.

Particularly since 2008, we have stopped depending on our income rising significantly year-on-year.

The result: we are getting better at budgeting.

Knowing precisely how much we have coming in means we slowly get better at managing our costs in line with virtually static monthly incomes.

So, we should not be as alarmed as many were with the 2016 Money Advice Service research study that found that 16.8m people of working age in the UK had less than £100 of accessible savings.

If you think a little deeper about that statistic, it suggests that the majority of workers have a finely-honed ability to manage their spending accurately between pay cheques.

Watch a parent out shopping with their kids and you will see it in action as they say, ‘Ask me again when I’ve been paid and maybe you can have that’.

So, what we need to deliver to many of the 16.8m captured by the MAS research is a monthly retirement income that is predictable and will last their whole lifetime.