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What is a Collective Defined Contribution pension scheme?

By:  Kate Anderson | 26th September 2021

There is a new kid on the block when it comes to pension schemes. The Pension Schemes Bill paved the way for the creation of Collective Defined Contribution (CDC) schemes.

This new type of hybrid pension scheme looks to combine elements of defined benefit schemes with the principles of a defined contribution scheme.

Let’s take a look at what they are and why you may want one.

Collective Defined Contribution scheme: what’s it all about?

A Collective Defined Contribution scheme is where both the employer and the scheme member pay into a pension pot that grows over time. But instead of each member saving into an individual pot, the collective pot is shared between all members.

The emphasis behind adopting this sort of scheme is that it gives employers a fixed budget to work with. It also provides greater security for members.

What are the advantages?

There are definite advantages to a Collective Defined Contribution scheme:

What about drawbacks?

The main drawback of a scheme like this is that there is less potential for really dynamic growth. While you reduce the risk by sharing it, you don’t have the autonomy to make your own retirement provision decisions. As a result, maximum returns tend to be lower.

There is also a concern that Collective Defined Contribution schemes may not be entirely fair. That’s because younger members’ contributions could be used to pay older members’ benefits. However, if these schemes are set up in the right way, with the correct safeguards in place, this shouldn’t be a worry.

Take home

If you are unsure about whether a Collective Defined Contribution scheme is right for you, it may be worth seeking some independent financial advice. Unbiased.co.uk is an online directory that matches you to a financial adviser in your local area. A financial adviser will be able to take a look at your pension provision and advise you on the best course of action for your finances.

Of course, Collective Defined Contribution schemes are still very new and it will depend on whether or not your employer offers one. But it is always worth looking at your options. Sensible retirement planning can make a big difference to what standard of living you can achieve in later life.

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