A BRAND new pension scheme is rolling out from today – here’s five ways it will affect you and your money.
Known as the Collective Defined Contribution (CDC), some employees may have another workplace pension option to choose from.
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From today, companies across the UK can start actively offering the new scheme.
CDC pension schemes work by employer and member contributions are pooled together into a collective fund and invested.
Workers then get a specified pension income once they retire.
Previously, workers only had two types of pensions to choose from.
These are:
Defined benefit (DB) pensions – where what you get in retirement is decided based on your salary, and you’ll be paid a set amount each year on retiring. These schemes are not usually offered by employers anymore.
Defined contribution (DC) – where contributions from you and your employer are invested and then your retirement pension depends on the size of your individual final pension pot.
Phil Warner, head of regulatory development and policy at Hargreaves Lansdown said the new CDC scheme will “sit between the two” existing schemes.
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He said: “It will aim to provide specific benefits, but won’t promise to provide them.
“In this scheme, all employee and employer payments are grouped together, with the total benefits paid being dependant on the overall investment return rather than each individual’s pot.”
So instead of having an individual pot the workforce for the company shares one big pension pot – which can be used to make investments with higher return.
Phil said: “This collective approach to risk and costs can benefit some pension scheme members, provided these are apportioned fairly.”
As the pot is collective it’ll be worth more, leaving more money to invest and potentially higher returns.
Here’s five things to know about the new scheme, including whether you could get more money when you retire.
You don’t have your own pot
The most common workplace pension offered is a DC pension – where both you and your employer contribute a minimum amount of money each month into your own pension pot.
A minimum of 8% must be paid into your pension in total.
But with a CDC pension, you don’t get your own pot.
Instead, workers in your business will put money into a collective pot – with your employer contributing too.
This pot is shared between workers, with each employee drawing an income from this big fund when they reach retirement.
Could I get more money?
In theory, you could get more money when you retire under a CDC scheme.
Hargreaves Lansdown senior pensions and retirement analyst Helen Morrissey previously told The Sun, this is because workers of different ages will invest into a collective pot of money.
This allows cash to be invested in “higher risk investments that might not be otherwise possible for older workers”, she says.
This is because there is a much bigger pot of money to invest, compared to your own individual pot.
The bigger the amount you invest, potentially the bigger the profit you could make – but you are in no way guaranteed a return.
“If times are tough on the stock market, or people – especially those in ill health – transfer out, then the scheme may have to reduce the income it aims to pay out,” she said.
Younger workers could lose out
Older workers can get access to higher risk investments – potentially boosting their cash – but as younger workers are adding to the collective pot, some have argued that the scheme could be unfair.
AJ Bell head of retirement policy Tom Selby previously told The Sun experts have argued that a CDC scheme “risks becoming an albatross around the necks of the next generation, with sons and daughters asked to make bigger contributions to pay for their parents’ pensions”.
Although the government is consulting on how CDC schemes can be launched where both young and older workers benefit, Mr Selby said “it remains to be seen” whether this will happen, and whether there will be a demand for the scheme in the first place.
How can I sign up?
Your employer will have to set up a CDC scheme before you can apply to it.
Employers will be able to set themselves up with a CDC scheme from today.
It’s worth getting in touch with your company to see whether it is planning to offer this option or not.
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