The U.K. government is moving to clear tax obstacles standing in the way of its goal to consolidate smaller defined contribution pension schemes into larger, consolidated funds and the development of default income options for retirees, both priorities of the 2026 Pension Schemes Act.
The 2026 s Act—which received Royal Assent in April—is a framework the country is using to reform workplace defined benefit and defined contribution plans in the U.K.
The Autumn Budget, released on October 28, builds on that framework with proposed tax changes intended to make consolidation and new retirement-income arrangements easier to implement.
Priorities of the Pension Schemes Act include the consolidation of numerous smaller DC plans, into fewer, larger plans, each with billions of pounds of assets if consolidated, that can take advantage of scale to invest more cheaply and broadly. The act also requires DC plans to offer default retirement income options for participants approaching retirement.
The changes are expected to be introduced through the Finance Bill 2027-28, along with tax provisions supporting guided retirement and retirement-only collective defined contribution plans.
Retirement-only collective DC plans would allow an individual to transfer an accumulated pension balance into a collectively managed fund that pays retirees an income for life.
“Defined Contribution pension schemes will soon have to offer default solutions for turning pension pots into retirement income. One of the options for that, Retirement CDC, offers a way to pool longevity risk so that members receive an income for as long as they live, without locking them into the low-return investments that underpin annuities,” said Simon Eagle, head of CDC and Risk Sharing at WTW, in a statement.
WTW has estimated that retirement CDC could produce expected income approximately 40% higher than would be created by an individual purchasing a lifetime annuity at retirement, although actual payments could rise or fall and the comparison depends on the assumptions used.
“A member ‘cooling off period’ will help alleviate potential Trustee concerns around putting forward Retirement CDC as a default income solution – members will have a short-term option to change their minds if they no longer want the income for life. This is similar to successful cooling off periods provided by some similar international schemes,” Eagle said.
Tags: Pensions