Millions of savers could retire with more money to spend in their later years after the government rubber-stamped a new-style pension.
Collective defined Contribution (CDC) pensions are set to become the next big thing in workplace pensions.
Work and Pensions Secretary Amber Rudd hailed the new scheme as a revolution in pension saving.
“Introducing a completely new pension scheme to the market is yet another revolutionary reform in this government’s quest to transform the retirement saving culture in this country,” she said.
“These pioneering proposals should deliver improved investment returns for workers and savers while cutting costs and red tape for British job creators.
“The new type of pension is currently used in Denmark and the Netherlands – two countries widely recognised as having among the best pension systems in the world.
“Any steps that result in better saving returns for workers are something to celebrate and I look forward to working with industry to enhance the prospects of millions of workers.”
Unlike traditional workplace pensions, pay-outs are not affected if the employer backing the scheme goes bust.
Savers can also benefit from bigger retirement funds by pooling their contributions with other savers to maximise investment returns.
The Royal Mail and Communications Workers Union have worked together on developing Britain’s first CDC with the government and hope to introduce the scheme when MPs have voted a bill to implement CDC pensions through Parliament later this year.
Reducing pension income risk
Terry Pullinger, CWU Deputy General Secretary Postal, said: “The response to the consultation on these proposals, and the degree of support from many key players, confirms our belief that the pensions industry is in genuine need of scheme innovation.
“We are very proud and ready to be at the forefront of this historic moment which we believe will make a major contribution to offering future dignity and security in retirement for decent working people.”
CDCs differ from current defined contribution and defined benefit pensions as they do not build individual retirement pots for workers but pay a regular income from a combined fund, like the state pension.
This removes the decision about how to best spend or invest a pension pot – and reduces the risk of poor returns on investment in retirement.