I have been asking for a one page summary of CDC risks and benefits that a member could understand – but its never appeared
But then the member is not the client…….

— rob reid (@reidremoney) August 15, 2023

Dear Rob,

Like you, I am closing in on retirement and considering my retirement options , like you, I have been prudent and saved all my life- I have a reasonable pension pot and now have choices. Until recently my choices were to buy a guaranteed pension (an annuity) , to cash out  or to draw money from my pot. I don’t like paying unnecessary tax, so I have discounted cashing out for me

But if I had a very small pot, I’d think I might cash out and use the money now, especially if it meant more state benefits. BTW, everyone should check to make sure they have a full state pension and consider topping up the state pension if they don’t have a full entitlement.

But back to you and me Rob. I said “until recently“, but lately it’s become clear that there may be another option for me to think about, something called CDC.

Let’s be clear, there are no CDC pension plans yet, though one is on its way. But I’m told that unless I work for Royal Mail, I can’t join it. Happily, I am also told that the Government is considering allowing CDC plans to set up, into which I can exchange my pot for a pension. This interests me as someone with just a personal pension pot. I guess it would interest someone who has a pot in a master trust or an occupational scheme, the same way,

Here is my one page summary of  “benefits” and “risks” . You may be thinking the same for you and your clients and I’d love to chat these through  (Zoom henry@agewage.com)

Benefits

• I would get from CDC an income for life which aimed to increase with inflation
• That income could be boosted if I was in bad health to reflect my shortened life expectancy
• I’d expect that income to be higher than I’d get from an annuity because
  • It would be invested in long term assets that give better returns than an annuity provider gets
  • It would invest in a collective fund with low charges
  • It would not guarantee me increases or even that my income might not go down, this would mean all of my money would be fully invested.
• That income would be easier for me than drawdown because
  • Unlike a drawdown from my pot, I would not be responsible for investment
  • I would not need to pay a financial adviser for cashflow management
  • My money would last as long as I did, or if I included my partner, my partner did.

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Risks

• Using a CDC means trusting someone else to pay you an income for life – that’s a tall order.

• For it to work , that “someone” is going to have to do a better job of  investing than an insurer or your drawdown manager

• For it to work, you are going to have to be in a pool of people that insure each other against living too long, managing such a pool takes skill and precision

• You also need to be sure that the CDC plan is sustainable, that new people will join as old people die and that there is protection against the plan failing

• Unless the plan is written as a fund (in which case it is covered by FSCS) , you are on your own if things go wrong, no PPF and no FSCS.

• Finally, unlike with an annuity , you are dependent on your investments performing to expectations. You need to feel comfortable that you aren’t being “over promised”.

Weighing it all up

There is no silver bullet Rob – CDC isn’t a magic money tree. If you don’t like risk, buy an annuity where you get a lower income with greater certainty (and make sure you get a full state pension- if you don’t- top up)

If you want freedom to spend your money how you like, choose a drawdown (and make sure you get some advice or know what you’re doing).

But if you want an income for life that pays – over time- more than an annuity, you can live without guarantees and you don’t want full control , then the CDC plan is for you.

I am expecting to swap my pot for a CDC pension, but I’m not holding my breath. It has taken 6 years for Royal Mail and they still aren’t ready to go! A big risk to me , is that CDC never happens.

Yours sincerely

Henry

PS. Glad to hear you are recovering