Trustees and DC Pension Decumulation

Trustees to take financial planning decisions on behalf of members

It is well-known that many pension scheme members are “true default members” who don’t engage with their pensions. With new reforms focusing on DC pension decumulation, trustees working alongside advisers must now proactively ensure appropriate outcomes.

The Pension Schemes Bill, following the 2024 King’s Speech, is set to reshape how Defined Contribution (DC) pension schemes manage the decumulation phase. Decumulation is the process of gradually drawing down, or spending, the pension assets that have been accumulated during a member’s working years. The new Bill has a focus on improving engagement, offering better guidance, and ensuring tailored solutions, with the aim of these changes intending to deliver stronger outcomes for members.

A key aspect of the Bill is the expectation that trustees will be required to take a  proactive role in decumulation. This includes ensuring suitable default options for unengaged members whether within the scheme or through third-party providers – and improving member communication, with support such as pre and post-retirement workshops and online resources to help members make informed decisions.

On the surface, this shift is positive, promising greater value for members. However, the Department for Work and Pensions (DWP) is pushing for a mandatory default decumulation option. The goal is clear: to support disengaged members who might otherwise delay, forget, or make poor financial decisions. But the implications for trustees are complex.

The challenge for trustees

Until now, trustees have primarily focused on accumulation. Considering decumulation options will be new to many trustees, and comes with the complexity that it is inextricably linked to a member’s personal financial planning, interacting with other assets, income sources, and potential debt.

As an ex independent financial adviser (IFA), providing decumulation advice required me to complete a thorough Know Your Client (KYC) process, critical yield analysis, risk warnings, and ongoing support. However, under these reforms, trustees could be placed in a position where they are effectively making personal financial decisions for members—without ever speaking to them.

Understanding DC pension decumulation options

One of the biggest challenges is selecting an appropriate default option. Firstly, any pension income can affect means-tested state benefits. How will trustees be protected from potential claims if members state benefits are impacted by the decumulation default?

Then let’s consider the two main contenders:

Annuity

An annuity provides fixed income similar to that provided by defined benefit schemes, but choices around structure matter. If the default includes a 50% spouse’s pension and the member outlives their spouse, the member may make a claim that the trustees have included the spouses pension cost unnecessarily.

If the default is to RPI link the annuity and inflation remains low, the member then may potentially claim the cost of the benefit lowered their income in retirement unnecessarily. If a standard annuity is the default, those in poor health may feel penalised. The crux of the issue is trustees will make sweeping decisions for entire populations rather than tailored solutions for individuals and there is no ideal one size fits all option that will suit all members.

Drawdown

Trustees may then prefer to provide drawdown as the default. However, this triggers the Money Purchase Annual Allowance (MPAA) where a member’s annual allowance, broadly speaking the amount they can save tax free per year, is reduced from £60,000 p.a. for most members to £10,000 p.a. once a member has flexibly accessed their retirement benefits.

For a member in the transitional period between full accumulation and full decumulation, making further pension contributions may be important. But what level of drawdown? Drawing 4% per year is often considered sustainable, but members could argue they missed out on the mortality cross-subsidy an annuity offers and were exposed to unnecessary investment risk.

Tax considerations and member spending

Pension income is assessed for income tax, and the first £12,570 per year (personal allowance) is tax-free (subject to other income). Should the default pension income be set at £12,570 per year to optimise this tax efficiency? If a member doesn’t take this allowance before the 6th of April, they lose it for that tax year. But that is not to suggest the member should spend the £12,570. Should trustees really be expected to influence how members use their money? Furthermore, will the DWP expect trustees to extend their decumulation duties beyond providing financial options to actively guiding members’ spending habits?

Trustees, looking ahead

Most members won’t immediately spot the complexities – but that doesn’t mean they won’t in the future. Just as mortgage income protection costs once went unnoticed, members may eventually challenge aspects of default decumulation strategies.

For trustees, this is a defining moment. Navigating decumulation will demand significant Trustee Knowledge and Understanding (TKU) development. Balancing duty of care with personal financial implications is no small task, and the road ahead will require careful consideration, clear communication and a steadfast commitment to member outcomes. Trustees of DC schemes will need to implement a decumulation framework for their scheme or consolidate into a DC arrangement that already has decumulation structures in place.

The role of Dalriada.DCC in supporting trustees through change

Ultimately, the direction of travel is clear, trustees must prepare to take a more active role in supporting members through decumulation. But with increasing regulatory complexity and the need to balance personal financial decisions with scheme governance, this is not a challenge to face alone.

Dalriada’s Defined Contribution Consolidator (DCC) offers trustees a practical and forward-looking solution, simplifying legacy DC and AVC management while ensuring members benefit from lower fees, modern investment options and improved engagement tools.

As trustees navigate this new decumulation landscape, partnering with a professional trustee service like Dalriada.DCC can provide the expertise, governance oversight and member-focused outcomes needed to meet both today’s challenges and tomorrow’s expectations.