Should my client pay into their SIPP or join a CDC scheme?

18 Jun 2024

First seen on Professional Adviser

There are two exciting launches should happen in pensions in 2025. Firstly, we will see new multi-employer schemes springing up offering collective defined contribution (CDC) benefits, using the secondary legislation already drafted and sat on the Parliamentary runway awaiting clearance from the new government.

Secondly, we should see the first phase of ‘pot for life', expected to be a right for employees to direct their employer to pay their whole pension contribution to a scheme of the employee's own choosing.

Taking those two major developments together, advisers will have lots of clients facing a dilemma: their employer is launching a workplace CDC scheme for them, but they could ask that their contribution as well as their employer's contribution to be paid into their own self-invested personal pension (SIPP) instead. How should they be advised?

Individual circumstances

Such decisions need to be framed by the individual's circumstances and sometimes that makes them easy. A 45-year-old settled in their career and expecting to stay the next 20 years with their current employer will benefit greatly from the new workplace CDC. In contrast, a 64-year-old nearing the end of their career may simply feel that CDC is a great new idea which has arrived a little too late for them. So, instead, they're likely to welcome the top-up contributions being put into their existing SIPP.

Other clients will need a more in-depth analysis. Perhaps this analysis could be guided by these three questions:

• Which route will enable the client to achieve their financial and lifetime goals more reliably?
• What is the relative value for money offered by either route?
• Is the choice reversible if the client changes their mind in a couple of years?

When clients ask me a "which option should I choose" type question, I usually try and avoid giving a straight answer. It's their life, their decision and not mine. However, often I can help them to see the light by explaining the key features of each route. So, in choosing ‘CDCs or SIPPs?' (next year's "Daddy or Chips?", if you remember that famous 1990s McCains oven chips advert), perhaps the following guide will help:

CDC schemes key features

• Pays an income for whole of retirement
• Income expected to keep pace with the cost of living
• Provides a pension to a surviving partner, using a modern inclusive definition of partner
• Collective scheme with smoothed returns, each year's increase likely to be similar to last year's
• Run by trustees and regulated by TPR
• Trustees choose all investments

SIPP key features

• Pot can be drawn down as fast as you like
• Can invest in assets with a proven track record of dividend increases such as Investment Trusts
• Expression of wishes form can indicate to trustees who should get the leftover pot on death
• Individual scheme where current value of pension pot likely to be volatile
• Run by a commercial profit-seeking firm and regulated by the FCA
• Member chooses the investments, the Sipp operator may suggest ready-made multi-manager funds

Of course, an adviser's job is never finished. That's why advice charges are ongoing, and that's why the Financial Conduct Authority (FCA) wants to see evidence of those ongoing client reviews.

If the answer was that the client opted out of the workplace CDC scheme and took the contribution into their own SIPP, then this should be kept under review. And perhaps if they are promoted at work, or for whatever reason begin to feel a longer-term commitment to their employer, they could join the CDC at that point.

If the client decides to join the workplace CDC scheme at its launch next year, then that should be incorporated into the wider financial planning process. A CDC scheme will uprate the pension accrued following every annual valuation, and it would make sense to note the part this growing retirement income plays in meeting the client's goals.

It may mean some re-balancing elsewhere in the portfolio, and as the CDC progressively builds as a low-risk core to some clients' pension provision, higher-risk opportunities can be added elsewhere in their portfolios.

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