Almost a third of UK pensioners expressed a preference for Collective Defined Contribution (CDC) pensions as a decumulation option at retirement, instead of annuity or drawdown alternatives, according to research from Aon and Aegon.
Of the 1,150 respondents surveyed online in June and July 2022, 80% were customers of Aegon and, compared to the general population, they included a higher proportion of males (62%) and those over 55 years old (62%).
Participants were first required to choose a preference between annuity and income drawdown. At that stage, 33% of participants preferred the annuity option, and 67% preferred the income drawdown option.
They were then split into two groups based on their initial preference. Among those whose initial preference was the annuity option, 49% then switched to the CDC pension choice, while 51% still preferred the annuity. Meanwhile, for those that initially chose the income drawdown option, only 21% ended up switching to CDC.
Overall, 30% of pension savers expressed a preference for a CDC pension.
Matthew Arends, partner and head of UK Retirement Policy at Aon, said: “Almost a third of respondents expressing a preference for a CDC pension in retirement represents a significant proportion of DC retirees.
“Although annuities have become cheaper since the survey was conducted, I think we can still expect a CDC pension to be relevant to many.
“Consequently, decumulation-only CDC could be an attractive third option for DC savers, providing a distinctive alternative to annuities and income drawdown and addressing the underserved needs of a group of savers.”
Arends added that the aim when devising the research methodology was to make the decisions about the available decumulation options “as realistic as possible”.
He continued: “We wanted to emulate the thought process that people go through when considering different trade-offs and features.
“People chose CDC for its potential to deliver higher average outcomes in retirement than annuity purchase, while also providing what drawdown can’t – the certainty of an income for life.”
Steven Cameron, pensions director at Aegon, added: “There are many millions of members of DC schemes who face making future choices about retirement income. As automatic enrolment matures, more will have substantial pots at retirement and choosing well will be increasingly key to making the most of retirement. Our research findings support the Department for Work and Pensions’ (DWP) intention to advance a new ‘third choice’ of decumulation-only CDC arrangement.
“Annuities offer a guaranteed specified income for life, but in recent years have delivered an unattractively low income. Income drawdown offers maximum investment and income flexibility but risks the individual running out of money.”
Cameron added that the CDC pension tested has less flexibility than drawdown but would pay a higher income than an annuity, albeit with the risk it may vary up and down depending on market and scheme performance.
He continued: “With the CDC concept appealing to almost half of those currently attracted to annuities and to almost one in five currently favouring income drawdown, this is certainly worth the DWP exploring further.
“However, we envisage it as an option for the individual to select, not as any form of default retirement product.”
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