It is interesting to read the reaction of Ben Wilkinson, writing from outside the bubble of the financial services industry. There is going to be a a backlash from those who wish to encourage personal choice and engagement with the money in the pot.
Torsten Bell is certainly going to cement other pension changes that are imminent (IHT on unspent pots for one).
There is an interesting selection of commentators copied in to Ben Wilkinson’s post and I look forward to hearing from them all. It is hard to remember that the launch of the first go at CDC (Defined Ambition) was Steve Webb. I look forward to his reaction to the consultation as previously a fan of collective pensions.
Let’s not get carried away with this being something new. The Guided Retirement Framework and Retirement CDC were in the still recent Pension Schemes Act. The end of workplace pensions as savings plans has been in the offing since Guy Opperman’s Pensions Act of 2021.
It is only with the publication of these new consultations that there is a realisation that pension freedom will no longer be the default, that pensions are back in one shape or another.
This is the script for right-wing politicians. But large employers are ditching DC savings for collective pensions as the way to pension staff. They will swerve RCPS and Guided Retirement by participating in what we used to call CDC!
We will not see employers returning to DB, we may see Public Sector DB embracing elements of these new collective pensions, but it will not happen any time soon. Agreements were put in by a Conservative Government to preserve the guaranteed pension offered the public sector well into the next decade. You can read the detail here.
staff a pension.
The pensions minister, Torsten Bell, wants to close the gap between public and private sector pensions. It’s absolutely the right thing to do.
For years there’s been a growing chasm between the retirement prospects of those who are paid by the taxpayer and those who happen to work for a private company.
It’s not the fault of public sector workers, but it’s another illustration of how our government is incapable of acting like a financially responsible business would. Pensions that are linked to salaries and/or inflation pensions are largely extinct in the private sector because they are unaffordable. The Treasury is yet to accept that.
However, I fear Bell’s shake-up will do little to solve this and merely do more to erode our pension freedoms.
However, the income we get will depend on the performance of that investment fund, so an income rising with inflation is far from guaranteed. Details are still scant for now, but the key question will be how much of an income you will be offered and how that compares to what you could get if you invested your pension savings yourself.
No comparison
Ultimately, it is a misnomer to try to compare these schemes to those still on offer in the public sector.
Public sector pensions are so valuable because the income they provide is not linked to how much you save, but rather the salary you are paid during your service. And, crucially, it is guaranteed to rise in line with inflation, regardless of the cost.
So while a civil servant earning £150,000 may pay 8 per cent of their salary towards the scheme, while the government says it pays in 29 per cent, the reality is that the pension pay they get will be worth far more than those contributions. It is a little like the state pension: the average worker might make £75,000 of contributions over their career, but they will get back at least £250,000 over a 20-year retirement.
Private sector workers get a minimum pension contribution of 3 per cent of their salary from their employer and then have to rely on their own contributions and the stock market to provide the investment growth they need.
If a private sector worker’s pension collapses in value because of a stock market crash a day before retirement, that’s tough luck. Public sector workers do not have to worry about this. Bell’s plan will soften that risk, but not completely eradicate it.
I could be proved wrong, but I also suspect that these new retirement deals will still leave private sector workers vulnerable to inheritance tax on their pensions. This is not a consideration for public sector workers because their pension dies with them — and any reduced rate received by a surviving spouse is exempt from inheritance tax.
Chipping away at freedoms
The 2015 pension freedoms, which took away the requirement to buy an annuity with your pension pot, have been criticised for leaving savers facing too many complex choices, putting them at risk of making poor decisions.
The new plans suggest that we cannot be trusted to spend our pensions as we see fit. Bell pointed to research suggesting that pensioners are running out of money too soon. But why shouldn’t you empty your private pension early on in retirement while you are still healthy? If you have property wealth to fall back on, a healthy and tax-free individual savings account (Isa) and a full state pension, there can be no complaints.
We’ve been told we will be able to opt out of the new regime, but that will take a conscious effort and we know that inertia is often a more powerful force than action.
Defined contribution pensions are simple: you can see what you have, how much you are paying in and what it is likely to provide you. The investment industry suggests that keeping your pension pot invested and withdrawing 4 per cent every year, should ensure it will last a good 30 years.
This new shake-up threatens to bring more complexity and more state intrusion into our retirement funds, when what we really need is for firms and workers to be able to afford to pay more into their pensions.