Highlights
- Around 17 million private sector workers could benefit from the proposed changes.
- Nearly 46 per cent of first-time pension withdrawals involved people cashing in their entire pot.
- Pension providers will be required to offer a default retirement income option.
- Savers will retain the freedom to withdraw money, buy an annuity or manage their investments themselves.
THE government has unveiled plans to offer around 17 million private sector workers the option of a pension income for life, in a major reform aimed at preventing retirees from exhausting their savings.
Under the proposed system, known as Guided Retirement, pension providers will be required to offer a default option designed to provide a regular income throughout retirement, unless savers choose an alternative.
The Department for Work and Pensions (DWP) said the reforms would help people who currently face complex financial decisions when they leave employment and begin drawing from their workplace pension pots.
Pensions minister Torsten Bell said private sector workers deserved a better deal after years of saving.
"Too many are left without a genuine pension," he said. "We are resurrecting proper pensions for private sector workers, guaranteeing them the option of an income that lasts throughout retirement and in many cases protection against the rising cost of living."
Concerns over pension savings running out
The proposals follow concerns that people are withdrawing their pension savings too quickly without considering how long they may need the money.
Government figures show that around 46 per cent of first-time pension withdrawals in the 2025-26 financial year involved the entire pot being cashed in. People with smaller savings, particularly pots worth less than £30,000, were more likely to withdraw the full amount.
Ministers believe the current system places too much responsibility on individuals to decide how much they can safely withdraw, how to invest their remaining savings and whether their money will last.
The government said the new approach would build on the success of automatic enrolment, which has brought more workers into workplace pensions. Nine in 10 eligible private sector employees are now saving into a pension, compared with four in 10 in 2012.
However, most are enrolled in defined contribution (DC) schemes, where employees and employers pay into an investment pot rather than receiving a guaranteed retirement income. Most private sector defined benefit schemes, which traditionally provided an income for life, have closed over the past three decades.
How Guided Retirement will work
Under the proposals, pension providers will take greater responsibility for managing retirement savings and turning them into a sustainable income.
One option is a Retirement Collective Pension Scheme, under which members' savings are pooled and invested across different asset classes. Sharing investment risks could help deliver more stable returns and potentially higher incomes than traditional annuities.
Consultants WTW estimate that such schemes could provide an income around 40 per cent higher on average than a typical annuity.
However, while payments could continue throughout retirement, the amount would not necessarily be guaranteed and would depend partly on investment performance and actuarial assumptions.
Providers would also not be required to offer a guaranteed lifetime income to people with less than £10,000 in pension savings with them.
Pension freedoms will remain
The proposals mark a significant shift from the pension freedoms introduced by the Tory government in 2015, which allowed people aged 55 and over to access their defined contribution savings more flexibly.
Under the new plans, savers will not be forced into the default option. They will retain the choice to take their tax-free cash, buy an annuity or manage their pension through drawdown.
Former pensions minister Sir Steve Webb welcomed the basic idea but warned against placing too much emphasis on lifetime income at the expense of flexibility.
Many people, he said, might prefer to take their pension savings in larger amounts rather than spread them across several decades. This could particularly apply to homeowners and couples who already have secure retirement incomes.
Zoe Alexander, chief policy officer at Pensions UK, welcomed the proposals, saying people approaching retirement should not be left to navigate complex financial decisions alone.
However, James Heal of wealth management company St James's Place warned that default solutions might not reflect everyone's personal circumstances.
The government has launched consultations on Guided Retirement and the regulations governing collective pension schemes. The consultation closes on December 22, with some requirements expected to take effect from summer 2029 and others from summer 2030.
