Collective defined contribution pensions explained

A collective defined contribution (CDC) scheme is designed to give you a regular pension income when you retire, without needing to make complex financial decisions.

In most other defined contribution (DC) pension schemes, you’ll need to decide how and when to take your money when you reach retirement age. For example, by buying a guaranteed income (called an annuity) with some of the money and leaving the rest invested.

But you won’t need to make these decisions with a CDC scheme. Instead, you’ll always get a regular pension income for life. You may also have the option of taking a cash lump sum.

It’s called a ‘collective’ scheme because your money is invested together with the contributions from your employer and other scheme members.

The idea is that the scheme can grow one ‘pooled’ pension fund at a higher rate than managing your money individually, as most other DC schemes do. This is because the risk is spread across every member of the scheme.

We explain how it all works below.

If your employer offers a CDC scheme, you’ll both usually pay a fixed percentage of your pensionable salary into the pension scheme each month.

There’s a minimum you both need to pay in, but you and your employer can choose to contribute more. Some employers will match your extra pension contributions up to a certain limit, so this can be an easy way to boost your retirement savings.

If you have money in other pension schemes, your CDC scheme might let you transfer it in. Ask your pension provider if this is an option.

If your other pension is worth over £30,000, you might need to get regulated financial advice before a transfer will be allowed. This is to make sure you’d be better off moving it.

If you’re considering bringing your pension pots together, see our guide Making the most of your pensions for more information.

A CDC scheme will provide you with a pension income in retirement.

How much you’ll get depends on the calculation your pension scheme uses. Typically, this will be a fraction or percentage of your pensionable pay for each year you’re a member of the scheme. For example, 1/80th or 1.25%.

But this is not a guaranteed amount. Your pension income can rise or fall depending on many factors, including how well the scheme’s investments have performed that year.

Some CDC schemes let you build up a separate amount from your pension income to take as a cash lump sum when you retire. 

This will typically be a percentage or fraction of your pensionable pay for each year you’re a member of the scheme. It can grow based on how well everyone’s money is invested, but it might be at a different rate to your pension income.

If you don’t have this option, you might still be able to take a cash lump sum when you retire by giving up some of your future pension income. 

Under current tax rules, you could get some or all of a lump sum tax-free. This is often a benefit as you usually pay Income Tax on the rest of your pension income.

Most pension providers manage your money separately from other members. This often means your money will be moved to less risky investments with potentially lower returns the closer you get to retirement.

In a CDC scheme, everyone’s money is invested together by professional investment managers. The idea is that they can focus on making sure the entire fund has enough money to pay everyone their pension income. This might mean the whole fund grows at a higher rate.

Your CDC scheme will be run by trustees. They are responsible for everything, including:

• deciding how everyone’s money is invested
• calculating the administration charges to run the pension scheme
• paying retired members, and
• hiring specialists to help them run the scheme – such as investment managers and actuaries.

This means you cannot choose how your money is invested, like only wanting ethical investments. If you want this option, you’ll need to ask your employer if they will pay into a different defined contribution scheme instead.

Once a year, the trustees of a CDC scheme must get a valuation of the scheme’s available assets. This is to check there’s enough money to pay everyone their pension income.

If there’s more money than needed, your pension income should increase. If there’s less, your pension income might go down or increase at a lower rate than normal.

These changes apply to every member of the scheme at the same rate, including if you are already taking your pension. An annual benefit statement will explain how your pension income has changed.

Before you start taking your pension, you can choose to move your money to a different scheme. You’ll need to ask your provider for a statement telling you how much your pension is worth before you can move it.

Think carefully before transferring or combining your pensions. Once you tell your provider to go ahead with the transfer, you can’t usually change your mind.

There’s also a risk you could lose out by transferring your pension, so always make sure you understand how your pension benefits could change. If you’re unsure, consider paying for financial advice.

Our Find a retirement adviser tool can help you locate advice online, in person and over the phone. Or, for more information, see our guides:

• Transferring your defined contribution pension
• Transferring your defined benefit pension.

If you leave a CDC scheme within 30 days of joining, you can usually ask for a refund of all the money you’ve paid in.

If you leave your CDC scheme after this, the money normally has to stay invested in the pension scheme until you reach your retirement age, unless you decide to transfer it to another scheme.

See our guide Leaving your pension scheme for more help. 

Your CDC scheme will tell you the age you’ll need to be to receive your pension. This is called your normal retirement age. It's often the same as your State Pension ageOpens in a new window

You might also be able to take your pension before or after the normal retirement date, depending on your scheme’s rules.

Your CDC scheme might still pay out after you die. This is called a death benefit and is often a percentage of your pension income or cash lump sum.

Make sure you keep the details of your beneficiaries up to date so your pension provider knows who to pay.

You can check the rules of your scheme to see what death benefits they offer. Ask your provider to explain anything you’re not sure about.

For more information, see our guide What happens to my pension when I die?