Private workplace pension savers set to get easier income choices at retirement

Guided retirement would require pension schemes to offer a default route for savers nearing retirement.

Millions of private sector workers with pension savings could soon be offered what the Government says may be a simpler way to turn their retirement pots into income.

Pensions minister Torsten Bell has launched a consultation on “guided retirement”, which will examine how default pensions should operate in practice.

Under the plans, pension schemes would have to provide a default pension option for people approaching retirement. Ministers say that could reduce the risk of savers drawing down their pot too quickly in later life.

The Government says the aim is to reintroduce pensions that provide an income, often protected against inflation, for the whole of retirement without requiring complicated financial decisions.

Many private sector workers save in defined contribution (DC) pensions, where they carry the risk of how much retirement income they ultimately receive.

After years of saving into a DC pot, people would be able to access a stable income for the rest of their lives, according to the Government.

Defined benefit (DB) schemes, which guarantee a retirement income based on salary, have largely been closed in recent decades.

Since automatic enrolment was introduced, around nine in 10 eligible private sector workers are now saving into a workplace pension, compared with four in 10 in 2012.

But there have been concerns that some savers are withdrawing pension money too quickly once they retire.

In 2025-26, about 46% of first-time pension pot accesses involved the full pot being taken out, the Government said.

Mr 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.”

He also announced a separate consultation on retirement collective pension schemes so that they can be used as a default pension under the guided retirement framework.

The consultations will ask how default pensions, including retirement collective pension schemes, should be designed and delivered, and how providers should support members nearing retirement.

The Government said people 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.”

Richard Knox, executive director of strategy, policy and analysis at The Pensions Regulator (TPR), 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 and now a partner at consultancy 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.”

He warned, however, that there is a “danger” that “lifetime income” products could be pushed too strongly.

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 at 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 at Scottish Widows, said there has been a “gap” in support for people who cannot afford financial advice but still need help making important 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 intends to adjust the state pension triple lock from April 2030 so that the state pension rises each year by the highest of 2.5%, inflation, or the amount needed to preserve its value relative to earnings as reached in April 2029.

Under the current triple lock, the state pension increases each year by whichever is highest: 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.”