Not everyone can afford the flexibility of drawdown or a costly annuity.  CDC is a better way for ordinary people to get “deferred pay”. We want to make retirement affordable for many more of us.

The freedom we were given in 2014 by George Osborne was from having to buy an annuity. The individual annuity is a luxury product for those who can exchange their pot of pension savings for certainty. My friend Mark Ormston rightly calls this a great time to buy an annuity if an annuity is right for you. For people who can afford to buy certainty, annuities provide it. The same can be said by the end game for private DB schemes who buy annuities in bulk.

But as means of providing deferred pay for the ordinary worker, an annuity cannot provide the income people are expecting and needing. This will be realisation people have when they see their pension pots expressed as “estimated retirement income” (ERI). This income will be based not on an income increasing by inflation but level (so falling behind inflation immediately). Even when the annuity is paid flat, with no increases, it will show the fall in pay people will get, even taking into account the state pension when they get to 67+.

As Hymans and Royal London have pointed out, we will on average find ourselves £12,000 pa down on the retirement we need in retirement. They call this the State Pension shortfall because you’d need to be paid your State Pension twice, to bridge the shortfall of your deferred pay in retirement.

That assumes we buy into the certainty of an annuity with the low average pots we have accumulated. It is only with the help of private and public DB pensions that many people can have the luxury of swapping their AVC pots, their legacy personal pension saving pots and their recently accumulated workplace pensions – for an annuity.

Those that have the means to swap pots for certainty will find great brokers like Retirement Line to help them do it, but they are not ordinary people, they are people who know what they are doing.

There will be a new kind of annuitant in years to come. Nest has used its enormous muscle to get a good deal for those who keep their money in Nest and survive to 85. They will be bought out of their pots and into an insurance arrangement underwritten by Rothesay. Between the point when they start drawing down on their pot (with the help of Nest) they will have the flexibility to spend their pot as they like but there is no certainty of the income they will get at 85 if they spend the pot as they like.

We have not seen the results of the work done by Nest for those taking their retirement guidance on the deferred pay they will recommend but my bet is that it will not delight most Nest savers. That’s because Nest will target a residual pot big enough when the savers makes 85 to keep paying deferred  inflation linked pay from an insured annuity.

Here is the sad but honest truth. We cannot have total flexibility, while having certainty unless we have enormous amounts of money. If we have a lot of retirement money we don’t need pensions and can use (until next year) our pension pot as a means for our successors to pay the inheritance tax bill we leave them if we die before 75. But that is not for those who Hymans and Royal London describe of a State Pension worth of income to make ends meet in retirement.

This brings me  to the alternative to buying an annuity when retiring or even on a “flex and fix” at 85. That alternative does not provide people with the flexibility of drawdown (what Nest will give you) but does give you up to 60% more pay than you would get from buying an annuity. That might and probably will not be enough to bridge the State Pension gap for many people but it will do something for them if they swap their pot(s) for retirement income. This is what will be coming our way in 2028 and will probably be up and running from some commercial master trusts. It is called Retirement CDC  – it’s a swap of pot for pension.

But for those who are saving for a retirement that’s not upon them today, then it will be possible for them to buy pension as they go along from a CDC whole of life pension scheme. This type of scheme has been a long time in the devising but it is now legislated for and from this summer, CDC pension scheme will start getting authorised.

These are the type of CDC schemes the Government reckon will pay up to 60% more than an equivalent annuity and for those who join such a plan, they will get better pension for their money over time. At a time when we struggle to save what we do into a pension pot, we may find the CDC answer a simple way of making our retirement more affordable.