Yet another major change in pensions is set to be announced in the Queen’s Speech.
In a bid to encourage saving for retirement and to encourage people to take more control over their personal finances, Chancellor George Osborne and Pensions Minister Steve Webb want to switch pensions from personal funds to collective funds.
The idea is a large group of small investors pooling their cash in a large fund can benefit from economies of scale and slash the fees they pay fund managers while benefitting from better rates of return on investments.
Similar pensions are already popular overseas – particularly in the Netherlands, where collective pension funds take the majority of the retirement saving market.
The pensions minister argues that savers will get more for their money, but not everyone agrees.
No income guarantees
Industry experts claim collective pension returns are not necessarily higher than personal pensions.
However, besides the chancellor and pensions minister, several other cabinet big guns are supporting the proposal, which could be available to savers as soon as April 2016.
The thinking is employers have moved pension risk from away from workplace schemes to individuals by closing defined benefit schemes offering a guaranteed pension income. Instead, they have switched to defined contribution schemes that build a fund based on stock market performance.
The risk for anyone saving into a defined contribution scheme is the value of the pension depends on the level of contributions and performance of equity markets.
30% more retirement income
The government is keen on collective funds because they pay a direct income at retirement, rather than converting a pension pot into an annuity, which comes with fees and transfer charges reducing retirement savings.
“Collective pensions work well in other countries and seem to give retirement savers more certainty about how much money they will have when they give up work and often pay out more than other pension schemes based on the same levels of contribution,” said Webb.
“Some experts argue that an ordinary saver could pick up a pension worth nearly a third more for making the same contributions throughout their working life.”
Webb agreed that collective pensions only offer a projected retirement pension and no guarantees, unlike a fixed annuity.
Also, the Dutch government have also reviewed pension planning and recently suggested collective funds should end – and instead workers should contribute to British-style personal funds.
