Savers now have access to a new type of hybrid pension scheme, which could help them improve their retirement returns.
New Collective Defined Contribution (CDC) schemes are said to offer a useful “middle ground” between existing Defined Contribution and Defined Benefit schemes.
What are the differences between defined contribution and defined benefit schemes?
- Defined Benefit (DB) – This type of pension includes final salary schemes and promises an employee a guaranteed retirement income, typically linked to how much they earned when they finished work.
- Defined Contribution (DC) – Under this type of scheme, savers can build up a pot of money that can be used to provide an income during retirement. The amount of income enjoyed by a saver is defined by several factors, such as how much is paid in, how the savings are invested and how the pot is used to support income during retirement.
DC schemes have become a lot more common due to the expense associated with running DB schemes given the length of time the average person lives following retirement.
DC schemes emphasise the saver maintaining themselves in later life by building a sufficient pot of savings.
How do CDC schemes work?
According to the Department for Work and Pensions, CDC schemes can provide improved retirement returns for savers and give employers more predictable costs.
Introduced under the Pension Schemes Act, through this new scheme employers and employees contribute to a collective fund from which individual retirement incomes are drawn.
This fund is overseen by trustees who are legally responsible for ensuring that the scheme remains viable and meets its commitments to members.
