UK plans default lifetime pension income for 17 million private sector workers

A default income for private sector savers

The Department for Work and Pensions opened a consultation on Tuesday, 3 November, on what it calls 'guided retirement', a default option that would pool private sector pension contributions into a managed product designed to pay an income for life. The government says the changes would affect 17 million workers who are currently paying into a pension. Savers who would rather not manage investments in later life would be the main audience, although anyone could still withdraw their money or invest it elsewhere. Pensions minister Torsten Bell presented the proposal as a simpler route from savings to income, and ministers describe it as applying the logic of auto-enrolment to the same group of savers.

Bell said that workers who save responsibly still find themselves short when they retire.

“Private sector workers deserve a much better deal when it comes to pensions.”

Why ministers say the system needs changing

Over the past 30 years most final salary schemes, which paid a set amount for life, have closed, leaving workers with a savings pot they must decide how to use at retirement. Earlier reforms under David Cameron's Conservative government gave pensioners more freedom to shape their own portfolios, and that shift was criticised for effectively forcing people to become investment experts. George Osborne also scrapped the obligation to buy an annuity, the product that pays a lifetime income. The government says about 46% of first-time pension pot accesses in 2025-26 involved the whole pot being withdrawn, leaving some people at risk of outliving their savings and relying on the state pension. Sir Steve Webb has warned about government hostility to pension freedoms, according to the Telegraph's report.

Auto-enrolment and the savings gap

Auto-enrolment, introduced in October 2012, requires employers to enrol every worker aged 22 and over into a pension scheme and make a company contribution, although workers can opt out. The government says about nine in 10 eligible private sector workers now save, up from four in 10 in 2012. Ministers credit the scheme with encouraging millions to save more for retirement. The guided model targets the next step, when savings have to become income. Concerns have been raised that some people run down their pension savings too fast once they retire.

201240%

November 202690%

2012

40 %

November 2026

90 %

Data from the article text

Industry reaction and open questions

Kirsty Ross of the People's Pension, a workplace pension provider, questioned whether millions of people can become retirement income experts quickly.

“It's unrealistic to expect millions of individuals to suddenly become retirement income experts.”

Simon Eagle, a collective defined contribution pensions expert at the consultancy WTW, said the scheme is expected to pay an income about 40 per cent higher on average than a typical annuity. Most annuities do not rise with inflation, which pooled assets could help with over time. Pensions experts welcomed the direction of the plans but said retirees should still be able to choose how to use their funds.

Consultations and what remains open

A second consultation covers retirement collective pension schemes, which could be used as the default pension under the guided model. Both consultations ask how default pensions should be designed and delivered, and how schemes should support members as they approach retirement. The government says savers who prefer a different option will remain free to choose. The sources do not say when the consultations close or when any final rules would take effect.