When people say “real” income, they mean income that keeps pace with inflation. Real income is a fantastic promise to make to someone retiring.
Those under 55 today are a generation for whom “stagflation” is no fear, they underestimate how hard it has been to keep pace with inflation at times over the past 80 years.
Stagflation is a combination of high inflation, low economic growth and flat or decreasing prices for investable assets.
During the 25 years when I was young (1961 -1986 ), inflation and interest rates were at a rate that many of us wondered if we’d have pensions. We thought we would be undone by inflation that regularly topped 10% and sometimes 20%. Inflation was the great worry to my generation going into work.
Yet somehow , the first workplace pensions came out of those difficult years and did so because despite the problems of high inflation and volatile markets, funded pensions that started to embrace long term real assets like equities and property.
The damage then of “stagflation” to the economy is somewhere in the back of my head and I don’t underestimate living at a time when inflation is targeted to be no more than 2 or 3%.
It’s not just the damage to the economy as the damage that those years created in society. The strikes and the industrial warfare were as a result of this economic mismanagement and the economy is now being managed better. The one thing that has been consistent over the course of my lifetime has been investment over time in real assets, it is the basis of CDC.
I do not write as an economist, I never did economics at school nor studied it at college , but I knew that inflation and the high interest rates it brought meant financial planning involved having faith that investing in real assets would eventually deliver financial comfort, it eventually did.
We are in a fortunate position to run pensions , whether that position is in the DWP and GAD – running the state pension or in the private sector as trustees , insurers and consultants. I read with pleasure this morning this paper by consultants LCP which confirmed that we are now returning to sanity on pensions , investing in real assets to beat inflation and delivering pensions to ordinary people (like me) who have a distant memory of losing to inflation.
Here is a summary- thanks LCP- the detaild findings are here
The paper accompanying the modelling accepts that the biggest threat to our pensions is stagflation, it points out that nothing can overcome high inflation and no growth in the economy or asset prices.
But it argues that taking a long term view, as this country did when I was young, is the way to win through. CDC is the way for us to invest for those who will be alive in the 22nd century!
Helen Draper Partner and Ivan Buzulutsky Partner –Contact Ivan
New modelling of how CDC schemes would have fared over the last 80 years shows well-designed CDC schemes prove resilient to radically different market conditions.
The analysis by LCP which uses actual historic returns and market conditions to model outcomes from different types of pension arrangements over time, highlights that over three out of the four time periods, the CDC pensioner ended the 20-year period with a pension that beat inflation. Only over the extreme stagflation regime of 1963–1983 was there a material real loss.
The modelling has led to four findings:
- CDC remains resilient across very different market environments – LCP’s modelling shows CDC delivers consistently stronger and more stable outcomes than individual DC across all four historic economic regimes modelled, outperforming inflation in three out of four 20 year periods. CDC smooths volatility by avoiding “point in time” losses at retirement, from a member perspective sitting between DC and DB in terms of risk and stability.
- Growth asset exposure drives CDC’s long term outcomes – CDC’s ability to maintain exposure to growth assets throughout retirement – unlike DC annuity purchase – underpins its resilience. Strong markets feed directly into higher pensions, while downturns do not permanently lock in lower outcomes.
- Outcomes vary by age and horizon – Younger members see stronger outcomes because they can benefit from “cheap accrual” during weaker market periods and have longer to recover from volatility. Older members have some protection of short-term pension purchasing power, with outcomes shaped by how increases and accrual costs shift year to year.
- CDC adjusts pensions over time rather than locking in outcomes – CDC pensions evolve with market conditions: they rise in strong markets and fall behind inflation in challenging periods, but avoid the large nominal cuts typical in some other designs. This flexibility reduces the risk of poor retirement timing and allows pensions to recover when conditions improve.
Ivan Buzulutsky, LCP Partner concludes:
“Our analysis highlights how different pension designs respond to very different economic environments. CDC does not eliminate investment risk, nor does it guarantee outcomes. Instead, it changes how risk is shared and how outcomes adjust over time.
“The experience of the past 80 years does not predict the future, but it does illustrate the structural strengths and limitations of different pension designs. For policymakers, trustees, and employers considering CDC, the key question is not whether risk can be removed, but how it should be shared — and whether members are comfortable with the form that sharing takes.”
Helen Draper, LCP Partner, added:
“One of the key strengths of CDC schemes is that they avoid locking in poor outcomes at a single point in time, allowing members to continue participating in long-term growth during retirement. Compared with purely individual arrangements, it spreads the impact of adverse market conditions across members and over time, reducing the severity of poor timing for any one cohort.
“These features come with trade-offs. Outcomes within CDC vary by age and market experience, and pensions in payment may fluctuate in real terms. Whether this is viewed as desirable depends on how fairness is defined: as individual ownership of outcomes, or as collective sharing of risk.”
There is nothing new about CDC, it would have succeeded for 80 years in the model created by LCP. It is important that we think of it as the basis of our of private retirement planning for the next 80 years and longer.
The U.K. pension system generally follows an EET (Exempt, Exempt, Taxed) model: contributions are exempt from tax, investment growth is exempt, but withdrawals (income) are taxed.
The last 30 years have seen this model shift from a relatively “wild west” era of high limits to a highly restrictive regime, and most recently, a significant liberalization under the “Pension Freedoms.”
So while saying invest for the long term is destroyed by the legislation that punishes the lowere liquidity and long term nature of successful infrastructure investment.
Key Changes to the Pension Tax Model (1996–2026)
1. The Pre-A-Day Era (1996–2006)
Before April 2006, the system was fragmented with different rules for “occupational” vs. “personal” pensions.
• Earnings Caps: Rigid limits on how much of your salary could be considered “pensionable” (often capped around £100,000).
• The Dividend Tax Blow (1997): One of the biggest shifts in the “Exempt” growth phase. Chancellor Gordon Brown abolished the ability for pension funds to reclaim tax credits on UK dividends, effectively removing billions in “exempt” growth value from pension pots over the following decades.
2. “A-Day” Simplification (April 2006)
The government replaced eight different tax regimes with a single unified framework.
• Introduction of the Lifetime Allowance (LTA): A total cap on how much you could save over your life without a 55% tax charge. It started at £1.5 million.
• Introduction of the Annual Allowance (AA): A cap on yearly contributions, initially set at £215,000.
• 25% Tax-Free Lump Sum: Codified the “Exempt” part of the withdrawal phase, allowing 25% of the pot to be taken tax-free.
3. The “Squeeze” Era (2010–2022)
As the government sought to reduce the deficit, the “Exempt” portions of the model were aggressively scaled back.
• Annual Allowance Cuts: The yearly limit was slashed from £255,000 (in 2010) down to £40,000 (by 2014).
• Lifetime Allowance Cuts: The LTA peaked at £1.8 million in 2011 before being cut multiple times down to a low of £1 million in 2016 (later indexed slightly to £1.073m).
• Tapered Annual Allowance (2016): Introduced a “sliding scale” for high earners, reducing their annual tax-free contribution limit to as little as £4,000 if their income exceeded certain thresholds.
4. Pension Freedoms (2015)
This changed the “Taxed” part of the model.
• Removal of Compulsory Annuities: Previously, most people were forced to buy an annuity (taxed income). After 2015, savers could withdraw their whole pot as a “lump sum” (though anything above 25% is taxed at their marginal income tax rate).
• Death Benefits: If you die before 75, your heirs can often inherit the pension tax-free (the ultimate “Exempt” loophole). If you die after 75, they pay their marginal tax rate.
5. The Radical Liberalization (2023–2024)
In a surprise move to keep older professionals (like NHS doctors) in the workforce, the government reversed many “Squeeze” era restrictions.
• Abolition of the Lifetime Allowance (2024): The LTA was completely removed. There is now no limit on how much you can grow your pension pot without a penalty tax.
• Annual Allowance Increase: The yearly contribution limit was raised from £40,000 back up to £60,000.
• Lump Sum Allowance (LSA): While the LTA is gone, the “tax-free” portion was capped at £268,275 (25% of the old LTA), ensuring the “Exempt” withdrawal part doesn’t grow infinitely for the ultra-wealthy.