Will you go Dutch with your pension?
Employees will be able to save for their pension in Dutch-style collective funds, under plans unveiled by the government.
The changes, which could be introduced by 2016, would allow workers to pay into funds with thousands of others, pooling their risk and theoretically lowering the costs associated with the fund, thus giving a higher return.
Ministers say the move to collective defined contribution schemes could give better value than current defined contribution schemes, though returns cannot be guaranteed.
Will Aitken, senior consultant at Towers Watson, added that the move wasn't necessarily about improving pension funds but creating more stable outcomes. "Collective defined contribution is sometimes presented as a magic wand that can make everyone better off in retirement but the government has never been convinced of that," he said.
"Instead, it hopes it can make pensions less of a lottery, rather than making them bigger on average."
The Private Pensions Bill was one of two pension bills unveiled during the Queen's Speech at the State Opening of Parliament in early June.
The other, the Pensions Tax Bill, will implement reforms to annuities announced in Chancellor George Osborne's Budget in March, which allow people to draw their retirement income out in one go.
The moves have received a mixed response from industry experts, with some praising the greater choice available to those approaching retirement age, while others are unhappy with the raft and speed of changes the government is introducing.
Alan Hingham, head of retirement insight at Fidelity Worldwide Investment, said: "Customers we speak to are totally confused by their choices, which leads to paralysis of action that benefits few."
Defined contribution pension
Often referred to as a “money purchase” scheme, although offered by employers (who may pay a contribution) these pensions are more likely to be free-standing schemes that a person contributes to regardless of where they are employed. Here, the level of benefit is solely dependent on the accumulated value of the contributions and their performance as investments. Therefore, the scheme member is shouldering the risk of their pension, as the scheme will only pay a pension based on the contributions and investment performance. The final pension (minus an optional 25% that can be taken as tax-free cash) is then commonly used to purchase an annuity that would provide an income for life.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.