Collective defined contribution pensions: how CDC schemes work

A collective defined contribution (CDC) pension is a workplace pension that pays you a target income for life. It is not a guaranteed income, the way a defined benefit (DB) pension is, and it is not a pot you draw down yourself, the way a defined contribution (DC) pension usually works. Instead, your money is pooled with other members' money, invested, and paid out as a regular pension. The scheme actuary checks the funding position every year and decides whether incomes can rise, stay level, or need to fall¹.

The first CDC scheme in the UK was launched by Royal Mail in October 2024¹. Until recently the law only allowed single-employer CDC schemes, which meant one employer had to run one for its own staff. That is changing: the Pensions Regulator laid an expanded code of practice in Parliament on 29 April 2026 covering multi-employer schemes, and has said multi-employer CDC schemes could be operating in early 2027². At least one provider is developing a multi-employer scheme targeting launch around 2027¹.

If you are in a CDC scheme, or your employer is considering one, the practical questions are what income you will actually get, how it can change, what it costs, and what happens if you want to take your money differently. This page sets out how the structure works and where the protections begin and end.

A CDC pension pays a target income for life, not a guaranteed one

The difference between CDC and the two older pension types comes down to who carries the risk. A defined benefit pension gives you a guaranteed income for life after retirement, based on your final salary or career-average earnings⁶. A defined contribution pension gives you a pot of money for retirement instead of a guaranteed pension, and the value of that pot can go up or down depending on investment returns and the contributions made⁷. CDC sits between the two: it offers a target income at retirement rather than a specified income like a DB scheme³.

That word "target" is doing a lot of work. The scheme aims to pay the income it has set, and it pools risk across all members so that one person living longer than expected does not exhaust their own pot. But because there is no guarantee, the income you receive can be adjusted. The scheme actuary assesses the funding position annually, and that assessment is what determines whether the scheme can afford to increase incomes, hold them, or reduce them¹.

For comparison, a DC pension gives you no such certainty at all. The amount of income it will provide when you come to retire is not guaranteed⁸, and drawdown in particular comes with no guarantees, unlike an annuity which pays a fixed income for the rest of your life⁹. A CDC scheme is designed to give you something closer to the DB experience of a regular income paid from the scheme, without the employer carrying an open-ended guarantee.

Why your pension increases can go up or down

In a CDC scheme, your income is not fixed at the point you retire. It is reviewed, and the review can move it in either direction. The scheme actuary assesses the funding position annually¹, and the outcome of that assessment feeds into whether members' incomes are increased, maintained, or reduced.

This is the central trade-off of the CDC model. In exchange for the possibility of increases, you accept the possibility of reductions. A DB scheme member does not face that, because the employer stands behind the promise. A DC scheme member faces a different version of the same uncertainty, because their pot's value can rise or fall with investment returns and contributions⁷.

It helps to see how other pension increases work, because CDC is not the only place where the amount you get can move. The basic State Pension increases every year by whichever is the highest of earnings growth in wages in Great Britain, CPI price growth in the UK, or 2.5 per cent¹⁰. Public sector pensions are increased in line with the Consumer Price Index every April¹¹. For someone living abroad when they retire, the pension from an occupational scheme will increase each year in line with the scheme rules and current legislation¹². CDC increases are set by the scheme's own funding position rather than by an external index, which is why they can go down as well as up.

Charges: capped at 0.75% a year

The charge cap that applies to workplace DC pensions is 0.75 per cent of funds under management a year, or an equivalent combination charge, on the default arrangements of qualifying schemes⁴. Independent guidance confirms that default workplace pension funds used for automatic enrolment are capped at 0.75% a year¹³, and that charges on the default investment option in workplace pensions are now capped at 0.75%¹⁴.

That cap matters for CDC because it limits how much of the pooled fund can be taken in charges each year, which in turn affects how much is available to pay incomes. For context, stakeholder pensions have a different limit: managers can charge up to one and a half per cent of your pension fund each year for the first 10 years and after that, up to one per cent¹⁵. So the workplace DC cap is lower than the older stakeholder limit.

Charges are not the only cost that can come out of a pension. If you take advice, or if a redress calculation is done after a bad transfer, different caps apply: in DB pension transfer advice claims, product and adviser charges are capped at 1.25% in line with FCA guidance¹⁶. That is a separate figure from the 0.75% annual charge cap and applies in a different situation.

Taking your money: tax-free lump sum, no drawdown, transfers out

A CDC pension works differently from a DC pot when it comes to accessing money. You do not buy an annuity: members' pensions are paid directly from the CDC scheme, in a similar way to a DB arrangement¹. That removes the annuity shopping-around step entirely, and it means the question of whether to buy a lifetime annuity, which cannot be changed later¹⁷, does not arise in the same way.

What you can generally take is a tax-free lump sum. Under the rules, you can take up to 25% from your pension as a tax-free lump sum at any time from age 55, rising to 57 from April 2028⁵. The same 25% figure appears across the guidance: people can receive up to 25% of their pension as a tax-free lump sum¹⁸, and in most schemes you can take 25 per cent of your pension pot as a tax-free lump sum¹⁹. If you take other lump sums later, 25% of those can be tax-free as long as the total tax-free amount is not higher than 25% of that pension and the lump sum allowance⁵.

Drawdown is not part of the CDC structure itself. If a member wishes to take drawdown, they will be able to transfer the assessed value of their CDC benefits into a DC scheme for drawdown or other benefit flexibility¹. That is the route out if you want the flexibility of a DC arrangement rather than a scheme-paid income.

Transfers in are also expected to be possible. The scheme provider says it expects members will be able to transfer into a CDC scheme from either DB or DC¹. Transferring a DB pension is a serious step: it is possible to transfer some DB pensions to a DC scheme, although this may not be a good idea²¹, and with a DC pension you can transfer the money into a different pension scheme²². If you are considering moving an existing pension into a CDC scheme, the same cautions apply as for any transfer.

Who can join a CDC scheme and when multi-employer schemes arrive

For now, the answer is narrow: you can join a CDC scheme if your employer runs one. Royal Mail launched the first CDC scheme in the UK in October 2024¹. The law originally allowed only single-employer schemes, which is why the first example came from a large employer with its own arrangement.

That is opening up. The Pensions Regulator laid an expanded code of practice for CDC schemes in Parliament on 29 April 2026, covering multi-employer schemes². The regulator has said multi-employer schemes could be operating in early 2027², and the code of practice is expected to come into force in mid-October². The legislation enabling multi-employer CDC schemes is expected to come into force on 31 July, with applications opening shortly after¹. One provider has said schemes would be able to apply for authorisation from mid-2026¹, and is itself developing a multi-employer CDC scheme targeting launch around 2027¹.

CDC schemes are authorised and supervised by the Pensions Regulator²³. That authorisation requirement is a condition of operating, not an optional badge, and it is the regulator that checks a scheme meets the standards before it can take members.

How CDC compares with DB and DC

The three pension types are easiest to understand side by side, because the differences are about who carries which risk.

The practical difference for a member is the certainty of the income. A DB member knows what they will get. A CDC member has a target that can move. A DC member has a pot whose value is not guaranteed⁷ and, if they use drawdown, no guarantees at all⁹.

Where protection stops

CDC schemes are authorised and supervised by the Pensions Regulator²³, which is the first layer of protection: a scheme has to meet the regulator's standards before it can operate. The annual actuarial assessment¹ is the ongoing check that the scheme can meet its targets.

The limits are worth stating plainly. A CDC income is a target, not a guarantee, so it can be reduced if the scheme's funding position requires it¹. That is the risk you accept in exchange for the possibility of increases. If you transfer your CDC benefits into a DC scheme to take drawdown, you move from a scheme-paid income into an arrangement where there are no guarantees⁹.

If something goes wrong with a pension, the Financial Ombudsman Service can look at complaints about additional contribution schemes and similar arrangements²⁴. For DB transfers specifically, the Financial Services Compensation Scheme compares the benefits you have lost from your DB pension with the benefits in your current pension to find the difference, and that difference is the compensation payable up to the limit²⁵. Product and adviser charges in those calculations are capped at 1.25%¹⁶.

For free, impartial help, the government's Pension Wise service explains adjustable income options⁵, and independent charities such as Independent Age provide guidance on private pensions¹⁷. If you are trying to trace a lost pension, tracing services can help you find it¹³.