Labour’s plans to introduce a pension for life scheme could leave millions of UK retirement savers exposed to falling incomes, reduced financial flexibility and smaller inheritances, according to former pensions ministers and industry specialists.
The Government wants pension providers to offer retirement collective defined contribution (RCDC) schemes, which pool members’ savings to provide regular payments throughout retirement.
The proposed reforms aim to improve retirement outcomes for workers who have accumulated pension savings but lack a reliable income strategy. Around 15 mn people are currently undersaving for retirement, raising concerns about living standards among future pensioners.
- Labour plans to introduce collective pension arrangements offering lifelong target income, with regulations expected to take effect from summer 2029 for most providers.
- Pension payments would not be guaranteed, leaving retirees exposed to investment losses, changing income levels and potentially inadequate inflation protection.
- Experts warn that a proposed 12-month transfer window could restrict access to pension savings and reduce the amount available to beneficiaries after death.
Unlike a traditional guaranteed pension, income from an RCDC scheme can increase or decrease depending on investment returns and the financial position of the collective fund.
How Labour’s pension for life scheme would work
Under the proposed system, pension providers would be required to offer customers a default retirement solution through a framework known as guided retirement.
The approach is intended to help savers who reach retirement without deciding how to convert their accumulated pension funds into income.
One option being considered is an RCDC scheme, which combines members’ pension savings into a collective investment fund and pays retirees a target income for life.
Payments would initially be calculated using the value of each member’s pension savings, projected investment returns and actuarial assumptions about life expectancy.
Pooling assets allows pension schemes to invest on a larger scale and share investment and longevity risks across members. Unlike an annuity, however, the income is not contractually guaranteed.
Pension payments could rise during periods of strong investment performance, potentially helping retirees manage inflation, but reductions would also be possible.
Pensions minister Torsten Bell has argued that too many workers reach retirement with savings rather than a structured pension income and should receive a better arrangement.
The Government believes collective pensions could narrow differences in retirement security between private sector workers and employees benefiting from more predictable public sector pensions.
Collective pension schemes could reduce retirement income
One of the main concerns is the possibility that pensioners will receive less income than initially expected.
RCDC schemes calculate target payments using assumptions about future investment performance and the longevity of their members. If investment returns fall short or actuarial assumptions change, the scheme may need to reduce payments to maintain financial sustainability.
Collective schemes distribute investment and longevity risks among members, but they do not eliminate those risks or guarantee that pension income will maintain its purchasing power.
Rob Morgan of Charles Stanley warned that investors should not assume collective arrangements automatically provide better financial outcomes.
“Income levels are not guaranteed, inflation protection may fall short, and payments could be reduced if investment returns disappoint,” Morgan said.
The calculations used to determine payouts can also be difficult for ordinary savers to understand, particularly when changes to income reflect several factors rather than investment performance alone.
Rachel Vahey of investment platform AJ Bell warned that default arrangements could steer people towards retirement products that do not match their financial needs.
She said pension savers must receive clear explanations of the risks, particularly the possibility of lower payments and restrictions on transferring their savings elsewhere.
Pension freedoms could be restricted after 12 months
Labour’s proposals have also raised questions about the pension freedoms introduced in 2015. Those reforms gave people with defined contribution pensions greater control over their retirement savings.
Savers can currently choose options including flexible drawdown, purchasing an annuity or withdrawing some or all of their pension pot, subject to applicable tax rules.
An RCDC arrangement would replace much of that individual flexibility with scheduled payments determined by the collective scheme.
Under the proposals, members could have only 12 months to reconsider their decision and transfer their savings elsewhere.
After that period, they would generally be expected to remain in the scheme.
Retirees who enter an RCDC scheme by default could lose the ability to access substantial lump sums after the initial transfer window closes.
Sir Steve Webb, a former pensions minister and partner at consultancy LCP, warned that people might not recognise the implications until their circumstances change.
Retirees may later want to use pension savings to help children purchase a home, pay for family events or cover substantial personal expenses.
Webb said it was essential for savers to understand the restrictions before their choice became effectively irreversible.
The potential loss of flexibility is particularly relevant to people whose retirement spending needs are irregular or whose circumstances change over time.
Investment growth and inheritance could be affected
Collective pension arrangements may also change how retirement savings accumulate and what happens to the remaining money after a member dies.
Under conventional pension drawdown, invested funds can continue generating returns while the pension holder withdraws money gradually.
Depending on market performance, the remaining balance may increase over time and can potentially be passed to beneficiaries, subject to inheritance and pension tax rules.
In an RCDC scheme, investment returns support the collective income arrangement rather than building an individually controlled pension account.
Members may benefit from investment growth through higher future payments, but they would have less control over asset allocation, withdrawal timing and the remaining value of their savings.
Because collective pension payments generally stop when a member dies, there may be no individual pension balance available to leave to family members.
Chris Rudden of digital wealth manager Moneyfarm warned that retirees could forgo opportunities to grow their savings through long-term investing.
He noted that retirement can last several decades, giving pension investments significant time to accumulate returns.
Rudden also questioned whether collective schemes adequately reflect the different financial priorities of retirees, particularly those who want to retain access to capital or leave an inheritance.
The effect on beneficiaries could be an important consideration for pension holders with substantial savings or dependants who may need financial support.
Labour pension reforms expected from summer 2029
The Government is consulting on the proposed collective retirement framework, with pension providers, investment specialists and consumer representatives expected to contribute.
Final regulations are anticipated to take effect from summer 2029 for most pension providers.
The consultation will help determine how collective schemes operate, what information providers must give savers and how members can exercise their rights to transfer out.
The Government’s objective is to improve retirement income outcomes for people who might otherwise struggle to manage pension withdrawals independently.
However, industry specialists argue that default pension arrangements must preserve meaningful choice and make the trade-offs between guaranteed income, investment growth and flexibility understandable.
The proposed system would not abolish existing pension freedoms. Savers would continue to have alternative retirement options, although the availability and design of default arrangements could influence which products they ultimately select.
