The DWP has launched a new consultation, Helping savers understand their pension choices: supporting individuals at the point of access as it seeks to put together a policy framework on pension savings decumulation.
Pensions Minister Laura Trott, said significant growth in the number of people saving into occupational Defined Contribution schemes – from 2.3m in 2012 to over 26.3m (including hybrid schemes) in 2023, “means that many more people will need to make important decisions about how they want to access their pension savings.”
The consultation, she said, sets out government proposals for “a decumulation framework that will provide support at the point of access.
“In addition to the existing choices available to members under the pension freedoms, this could include an offer of a Collective Defined Contribution (CDC) arrangement in retirement. My objective is to help savers achieve better outcomes through provision of CDC, where members can benefit from greater investment opportunities and consolidation in the market whilst supporting the wider government agenda around productive finance.
Collective Defined Contribution (CDC) plans. CDCs aim to provide a halfway house between defined benefit and defined contribution pensions by providing a regular income and addressing issues related to market volatility and sustainable withdrawal rates.
The proposals also include what responsibilities of trustees should have in supporting retirees and what decumulation products should be on offer, as well as proposing safeguards for savers during the decumulation phase to ensure that they’re not taking on too much risk or paying excessive fees.
Laura Trott added that the consultation, which closes on 5 September 2023, “is a real opportunity to help shape the next stage in one of the most challenging and significant issues in Private Pensions.”
Commenting, David Denton, technical consultant at Quilter Cheviot, said, “Decumulating from a pension can be treacherous, particularly without expert help and savers can easily see their retirement pots run dry before they pass away.
The government have not gone as far to propose exactly what products and services should be offered by providers but are intonating a framework to work from to improve the market.”
While people often underestimate how much they can safely withdraw from their pensions without running out, he added, “CDCs are largely unproven and are not the reality for most people today. Furthermore, they will only impact the workplace pension market, and won’t serve people with individual personal pension arrangements.”
Denton added that while well-meaning the proposals risk missing a “critical point”, which is that “too many people are still not saving enough into their pensions in the first place so their decumulation plans already start from a difficult point.
“According to the 2022 Financial Lives Survey by the FCA, just under half of people aged 18-54 have reviewed their pension pots in the last year, compared with 65% of those aged 55-64. This is worrying as it’s the younger generations that need to have more of a focus on accumulation while they still have time.”
Denton concluded: “We need to view the retirement market holistically and ensure that more savers are engaging with their pensions earlier in life. The consultation shows that the use of financial advice remains low and that a significant portion of adults aged over 50 did not compare providers before accessing their pension, and many were unaware they could switch providers or simply didn’t consider it.
“Giving more people access to advice or guidance in differing formats throughout their financial lives would improve the market immensely.”
