Private sector workers are set to be given access to guaranteed pension income for life, as the government aims to close the retirement savings gap between the public and private sector.

Under new plans set out by pensions minister Torsten Bell on Tuesday, providers will be required to offer workers an annual income as standard in retirement.

The plans, dubbed ‘Guided Retirement’, will “resurrect” the option of having an inflation protected pension that provides a secure income for private sector retirees.

Roughly 17m workers who are saving into a default pension will be given the option.

DB guarantee

The move is anticipated to bring retirement savings in the private sector closer to that of the public, where workers typically have a defined benefit (DB) pension.

DB schemes guarantee employees a regular, lifetime income upon retirement calculated by length of employment and salary. This differs to private defined contribution (DC) schemes where a worker’s retirement fund is built entirely from money paid by them, their employer and tax relief.

But over the last 30 years, the vast majority of private DB schemes that once provided an inflation protected income have been shut down.

While the introduction of automatic enrolment in 2012 has boosted saving among private workers, the majority of the UK sector are saving into DC schemes, leaving them without automatic financial security in later life.

“Private sector workers deserve a much better deal when it comes to pensions. They are doing the right thing and saving for retirement, but when they get there too many are left without a genuine pension,” said Bell.

“We are resurrecting proper pensions for private sector workers…and in many cases protection against the rising cost of living. Things public sector workers take for granted.”

Financial knowledge and loss of choice

The plan is also designed to stop savers from having to become “investment experts overnight” as most take control of their pot with little financial knowledge which can cause them to make rushed decisions.

According to the Department of Work and Pensions (DWP), around 46 per cent of first-time pension pot accesses involved a pot being fully withdrawn in the 2025/26 tax years, leaving many facing the risk of entering retirement without sufficient funds or being reliant on the state pension.

But Steve Webb, pensions consultant at LCP and former pensions minister under the Coalition government, warned that pensioners lose the “freedom and choice” of how and where to invest that comes with DB schemes.

“The government is right to say that managing a DC pot in retirement through the ups and downs of markets, and with no idea how long the pot needs to last, is challenging.  But there is a danger that the government’s hostility to pension freedoms will lead them to promote ‘lifetime income’ solutions too heavily,” said Webb.

“Many people will have a good level of secure income… and may prefer the flexibility to take their DC pot in ‘chunks’ as needed, rather than spread thinly through the decades of retirement. It is vital that the focus on retirement income does not destroy ‘freedom and choice’ in pensions which have been popular with savers and given valuable flexibility to hundreds of thousands of people in the last decade.”