“As the dust settles on the most radical pension budget for many years, the key question we are left with is whether the majority of pension savers will actually be able to take advantage of the new flexible rules post-retirement.
Significant numbers of high earners already use pension income drawdown options and will welcome the proposed greater future flexibility. But what about everyone else? The expenses and plethora of investment options of income drawdown are currently prohibitive for those with low to medium pension savings.
I think the answer for many will be some kind of Collective Defined Contribution (“CDC”) pension arrangement. CDC could operate a pooled pension fund for members who may come from a number of associated or non-associated employers. One of the key advantages would be that members could stay in the pooled arrangement post-retirement and draw their retirement income from the collective fund. This means they can share in a common investment strategy, and pooled expenses, both of which will benefit significantly from economies of scale, making income drawdown a feasible solution for many more savers.
Further regulation of CDC plans is required, especially around how a collective fund may operate. But we expect that, building on this pro-CDC budget, the Queen’s speech on 14 May 2014 will announce that CDC regulations will be built in to the next parliamentary agenda.
For more paternal employers, CDC plans can be made more sophisticated, with target benefits and pension increase policies that follow the fortunes of the investment strategy. But in its simplest form CDC just means sharing risk for DC savers, ensuring fairer outcomes, higher average incomes due to lower costs, and access to more of the retirement flexibility that the 19 March 2014 budget has opened up.”
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