Private sector pension savers to be given ‘simpler’ options to take an income

Millions of private sector workers saving into a pension will be given the option of what could potentially be a simpler way for some to turn their retirement savings into an income, under Government plans.Pensions minister Torsten Bell has announced a “guided retirement” consultation, looking at how default pensions should work in practice.Guided retirement will require pension schemes to provide a default pension for savers approaching retirement – which could help to protect people from the risk of running their retirement pots too low in their later years.The plans will bring back pensions that pay an income, often inflation protected, for the entirety of someone’s retirement, without the need for complex financial decisions, the Government said.Many private sector workers save into defined contribution (DC) pensions, where they bear the risk of the level of retirement income they will eventually end up with.After years of saving into a DC pension, savers will have the option of a stable income for the rest of their lives, the Government said.Many defined benefit (DB) pension schemes, which guarantee an income when people retire, based on their salary, have been closed in recent decades.Following the introduction of automatic enrolment into workplace pensions, about nine in 10 eligible private sector workers are now saving, up from four in 10 in 2012.But concerns have been raised that some people risk running down their pension savings too fast in retirement.In 2025-26, about 46% of first-time pension pot accesses involved the pot being fully withdrawn, the Government said.Read MoreMr Bell said: “We are resurrecting proper pensions for private sector workers, guaranteeing them the option of an income that will last throughout retirement and, in many cases, protection against the rising cost of living – things public sector workers take for granted.”Mr Bell also announced a consultation into retirement collective pension schemes, so these schemes can be used as a default pension under the guided retirement plans.The consultations seek views on how default pensions, including retirement collective pension schemes, should be designed and delivered and how schemes should support members approaching retirement.The Government said savers who want a different option will still be free to choose.Therese Chambers, executive director at the Financial Conduct Authority (FCA), said: “People should not have to navigate complex pension decisions alone.“Guided retirement will offer a simpler way to turn savings into income, regardless of which workplace pension people have.”The Pensions Regulator (TPR) executive director of strategy, policy and analysis, Richard Knox, said: “People need more help to turn a pension pot into a sustainable retirement income, and well-designed default options at retirement will help people navigate these complex and important financial decisions.”Sir Steve Webb, a former pensions minister who is now a partner at consultants LCP (Lane Clark & Peacock) said: “The Government is right to say that managing a DC pot in retirement through the ups and downs of markets, and with no idea how long the pot needs to last, is challenging.“So the basic idea of ‘guided retirement’ is welcome.”But he also said there is a “danger” that “lifetime income” solutions could be promoted to heavily.Sir Steve said: “If people want a secure income for life, the option of buying an annuity has always been there, but very few people freely choose it.“Many people will have a good level of secure income – especially in the case of a couple with two full state pensions and some other pension income – and may prefer the flexibility to take their DC pot in chunks as needed, rather than spread thinly through the decades of retirement.“This is likely to be true of homeowners in particular, who show a preference for front loading their spending to earlier in retirement.“It is vital that the focus on retirement income does not destroy freedom and choice in pensions which have been popular with savers and given valuable flexibility to hundreds of thousands of people in the last decade.”Jon Greer, head of retirement policy at wealth manager Quilter, said: “Default retirement solutions can help, particularly for those who do not want to navigate complex decisions themselves.“But they should be a safety net rather than a straitjacket.“People must retain the flexibility to choose a different approach and access personalised advice where appropriate.”Kirsty Ross, product and proposition director for People’s Pension, said: “Retirement default journeys should include clear consideration of members whose circumstances may warrant a more tailored approach, including those with particular health conditions, dependants, or wider financial needs.”Pete Glancy, head of pension policy, Scottish Widows, said there has been a “gap” in support for people who cannot afford financial advice, but still need help making important financial decisions.He said: “The FCA’s work on targeted support, alongside plans to overhaul simplified advice and advances in technology, could help close the gap for people who can’t afford full financial advice, giving them more support and confidence to make important retirement decisions.“These decisions can be complex and overwhelming, and many people don’t want to make choices themselves.“They expect Government, their employer and the pensions industry to do the right thing, and the consultation looks at how they can still get a good outcome from the pension they’ve built up while working.”Yvonne Braun, director of long-term savings policy at the Association of British Insurers (ABI), said: “Guided retirement has the potential to simplify decisions about accessing pensions, meaning more people secure an income for life.“But it’s important that people continue to have the freedom to make their own decisions.“We’re pleased to see the Government and FCA set out their plans, but the devil will be in the detail.“For these rules to work in practice, people need a clear and consistent journey when accessing their pension.”The Government has previously said it plans to adjust the state pension’s triple lock from April 2030 so the state pension rises each year by the highest of 2.5%, inflation, or the amount required to maintain its value relative to earnings as reached in April 2029.Under the current triple lock method used to calculate state pensions, the state pension rises each year in line with the highest of 2.5%, inflation, or earnings growth.Tom Selby, public policy director at AJ Bell, said: “Public sector pensions are backed by the state and the income they pay out is set in stone.“Although future accrual rates can be tinkered with to maintain affordability, benefits already accrued will always pay out a set rate guaranteed by the UK government.“The private sector will not see a resurrection of defined benefit and while ‘closing the gap’ may offer some additional choice, there will still be a yawning chasm between the types of pension available in the public and private sector.”Zoe Alexander, chief policy officer at Pensions UK, said: “Savers should retain freedom and choice, but those who do not make an active decision should have a well-designed pathway that helps them achieve a good retirement income.”