We always need analysis to help us make choices. We are getting a lot from WTW about decumulation CDC and the numbers don’t look anything like 60% better for CDC if you wait to swap your pot for a CDC pension at retirement. Why not?
Well – take a look!
What is great about WTW’s work is that they have made the comparisons on a peach v peach basis. This is most important when it comes to increases on the pensions
All the comparisons are made with an inflation linked income or pension or annuity. This is fun but Retirement Line tell me that you can’t buy a CPI linked annuity so this is a bit “made up”. It does make you a little nervous.
The modelling includes some interesting features like a 10 year pay out from the single pot by the CDC (less whatever has already been paid). This would mean your R-CDC would pay a partner a pension and the full amount paid to you would continue to be paid until 10 years from commencement after which the pension would reduce to 40% of what you got
Well done WTW.
Again thanks to Retirement Line for clarification. The truth is we don’t know what Retirement CDC will look like yet so we’re looking at guess work from WTW – no matter how smart the Maths!
There’s still good news but not as much!
The good news is that where an annuity would pay you £5,750 pa, CDC from a swap of a pot would give nearly £7,300 , 25% more than the annuity and 15% more than flex and fix.
The figures are lower than whole of life CDC because you’ve hung onto your pot till you retire. The “up to 60%” is what you get over the whole of your life buying pension and not saving in a pot.
The choice between flex and fix and CDC is still meaningfully in favour of CDC for pensions . But WTW are fair in pointing out that some people will prefer flex and fix to R-CDC as this picture explains.
It is very helpful that WTW do this hard work when it will be at least two years and probably three before you can buy a Retirement CDC.
We have yet to have the results of the consultation , the high level consultation or the Pension Regulator’s Retirement CDC Code- there will be authorisation after all that.
And at the end of it all, the prospects of getting access to growth assets for most of your life depend on you not living overlong
The scheme starts de-risking when you are at 7o and is mainly in bonds from 85, better than flex and fix and annuities – if in a collective fund- but it means a mature scheme will look much more like 60/40 in favour of growth and a scheme with just older folk in it may start looking more like an annuity. There is no spreading of risk over a wider group of people who may be as young as teens!
Herein the problem with waiting till retirement to collectively invest. What your DC pot has been invested in, in the years leading up to retirement may not be matching the growth assets of drawdown or R-CDC illustrated above.
In reality, we think that retirement is the Straits of Hormuz of pensions, the point at which the nastiest financial problem in pensions is presented as “choice”. Better and simpler to be in CDC for the whole of life or at least what remains of it!
Hi Henry, sorry for the confusion during the call yesterday. CPI is not an available option on annuities right now, so WTW have completed a calculation. However, a 10 year guarantee and joint life 40% is available. I was just questioning if the 10 year guarantee is meant to be protecting most of the capital. If so, why not use value protection? If not, why not increase the joint life to 50% or if possible 60/66% from the outset? This would feel like an easier communication for consumers and a more commonly preferred selection.
DB pensions usually require a 50% spouse’s pension by default (not 40%) to provide better long-term support for a surviving partner.
Two are said to live more cheaply, proportionately, than one, so maybe 60/66% would be fairer.