A MASSIVE pension change will affect some savers when it rolls out in August this year – here’s five ways it will affect you and your money.

The UK’s first Collective Defined Contribution (CDC) pension scheme will be launched later this year, and will be another workplace pension option to choose from.

Here's five things to know about the new CDC pension scheme - including if you'll get more cash

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Here’s five things to know about the new CDC pension scheme – including if you’ll get more cashCredit: Alamy

CDC pension schemes are where employer and member contributions are pooled together into a collective fund and invested.

Workers then get a specified pension income once they retire.

It marks a big shake-up for workers who currently have only two types of pensions to choose from.

Pensions are either Defined Benefit (DB) pensions, or Defined Contribution (DC) pensions.

A DB pension is where what you get in retirement is decided based on your salary, and you’ll be paid a set amount each year on retiring – but they’re not usually offered by employers anymore.

Instead, you’ll most likely have a DC pension, which is where you are automatically enrolled in your workplace pension scheme when you join.

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That means that you save in money each month and what you have to retire on is based on how much you’ve put away and how well your investments have done.

Here’s five things to know about the new scheme, including whether you could get more money when you retire.

You don’t have your own pot

The most common workplace pension offered now – a DC pension – sees both you and your employer contribute a minimum amount of money into your own pension pot.

A minimum of 8% must be paid into your pension in total – you must contribute at least 5%, and your employer at least 3%.

But with a CDC pension, you don’t get your own pot.

Instead, workers in your business would put money into a collective pot – with your employer contributing too.

This pot is “shared” between workers, with each employee drawing an income from this big fund when they reach retirement.

Could I get more money?

In theory, you could get more money when you retire under a CDC scheme.

Hargreaves Lansdown senior pensions and retirement analyst Helen Morrissey said this is because workers of different ages will invest into a collective pot of money.

This allows cash to be invested in “higher risk investments that might not be otherwise possible for older workers”, she says.

This is because there is a much bigger pot of money to invest, compared to your own individual pot.

The bigger the amount you invest, potentially the bigger the profit you could make – but you are in no way guaranteed a return.

“If times are tough on the stock market, or people – especially those in ill health – transfer out, then the scheme may have to reduce the income it aims to pay out,” she said.

Younger workers could lose out

Because older workers can get access to these higher risk investments – and boost their cash – because younger workers are adding to the collective pot, some have argued that the scheme could be unfair.

AJ Bell head of retirement policy Tom Selby said experts have argued that a CDC scheme “risks becoming an albatross around the necks of the next generation, with sons and daughters asked to make bigger contributions to pay for their parents’ pensions”.

Although the government is consulting on how CDC schemes can be launched where both young and older workers benefit, Mr Selby said “it remains to be seen” whether this will happen, and whether there will be a demand for the scheme in the first place.

It’s never been tried before in UK

This will be the first time a CDC pension scheme has been launched in the UK before.

But, The Royal Mail has been trialling it on its 140,000 employees to see how the scheme works – and if it’s worth it.

The Netherlands is most known for using CDC schemes – but its worth noting that the country is reportedly moving away from this according to the Financial Times, and using DC pension schemes more instead.

Mr Selby added that this was because retirement incomes were cut when investments did not meet expected returns.

“Everyone just needs to be realistic about what CDC pensions can offer and their limitations,” he said.

How can I sign up?

Your employer will have to set up a CDC scheme before you can apply to it.

This means they may not want to – and you won’t be able to invest your pension in this way if not.

Employers will be able to set themselves up with a CDC scheme from August this year.

It’s worth getting in touch with your company to see whether it is planning to offer this option or not.

Here’s how to protect your finances – including your pension – as a cost of living crisis bites.

A pensions expert has shared how you can become a millionaire in retirement.

A million pensioners could be losing out on up to £1,800 a year – how to check if you are owed money.

How much is the state pension in 2022 and will it increase?

This post first appeared on thesun.co.uk

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