The government’s new pension plan might hurt DIY investors

[TrueBlueTerrier]

https://www.investorschronicle.co.uk/co ... c575cb911f

Last week, the government laid out new regulations regarding the introduction of multi-employer collective defined contribution (CDC) schemes. Its announcement contained much fanfare, with the Department for Work and Pensions claiming such schemes could increase retirement income by up to 60 per cent because schemes would remain in higher risk, higher return assets for longer than in an individual DC pot.

CDC schemes operate on the basis that both employers and employees pay into a collective pot, managed by an external trustee. Once an employee retires, they will receive an income from the collective fund. However, while a target return will be provided for planning purposes, this income is not guaranteed, as it would be with a defined benefit scheme. The amount a retiree will receive can be impacted by the poor performance of the fund, or low levels of new contributions.

Regulations allowing single employer CDC schemes have been in effect since 2021. However, take up has been unenthusiastic. Royal Mail launched a scheme in 2024, but so far, it is the only employer to have done so.

Importantly, the new multi-employer schemes will allow several unconnected employers to band together to create a CDC scheme. In addition, the government has also published a consultation looking at options to allow defined contribution savers to convert their pots to a CDC scheme on retirement rather than taking control of the money themselves.

This option might appeal to less experienced investors for who managing their own pot in drawdown is not an appealing prospect. However, experienced and engaged investors might find that these schemes leave them worse off in retirement.

The problem with the CDC design is that while you give up control over your investments, you do not give up the investment risk as you would with a DB scheme. Should the fund underperform, it will be you who takes the hit. The annual income from a CDC scheme is not set and would be adjusted annually depending on performance and other factors. “If you give up your investment control, what you want is the guarantee of an income, whereas this is a kind of halfway house,” Claire Trott, head of advice at St. James’s Place, says.

For an experienced investor, it could make more sense to retain control over your investment decisions. Your pot could of course still fall in value, but you will at least have the ability to personalise your investment strategy so that it suits your lifestyle and convictions.

This could be particularly impactful in your early retirement years. With a CDC scheme you will receive a regular income year on year, whereas if you have a DC pot you can choose to draw down more in the early years of your retirement, when you are more active and have higher expenses. In this latter scenario, you could still choose to annuitise at a later date, if you no longer felt able to actively manage your portfolio and wanted the security of a guaranteed income.

Finally, the government’s headline 60 per cent figure should be taken with a large pinch of salt. “We have to be a bit careful when we talk about this 60 per cent figure, because depending on who you talk to some will say 20 per cent; others will say 20-40 per cent. But there are no guarantees,” says Renny Biggins, head of retirement at The Investing and Saving Alliance. Losing all investment control on the back of an unsecured promise sounds like a poor pay off for an experienced investor.