Will you lose out under pension reforms?

Existing pension savers could be forced to save £935 more each month to make up a shortfall in their pension contributions next year because of government reforms, according to figures from financial adviser Hargreaves Lansdown.

That's a hefty increase for many but the only other option may be to keep working until their late 70s.
Tom McPhail, head of pensions at Hargreaves Lansdown, said: "Basically, people whose employers reduce contributions as a result of the reforms are either going to have to save more, retire later or accept a lower retirement income. It is going to come as a painful shock to many."

The £935 monthly increase mentioned above is based on a 35-year-old worker earning £100,000 and hoping for a retirement income of £40,000.

Hargreaves Lansdown's calculations indicate that this person would need to save an extra £11,220 a year - or £935 a month - to make up the shortfall between the £13,643 pension he or she will receive under the new regime and the required retirement income of £40,000 a year.

Why are retirement incomes expected to fall by so much?
Under the new rules, due to come in next year, employers will have to pay at least 3% of each staff member's salary towards an employee's scheme, while workers will contribute at least a further 4% and the government 1%.

Workers will be able to opt out if they wish, but even they will be automatically enrolled again every three years in a bid to prevent total reliance on the State pension.

However, while only about four in 10 private employers currently provide a pension scheme, typical company contributions range from 6% to 10%.

And forcing employers to automatically enroll all staff members in their occupational schemes will undoubtedly mean lower employer contributions for many workers.

Research shows that reducing employer contributions from 6% to 3% would result in a 30-year-old male worker currently earning £25,000 losing £1,400 a year by retirement.

Will I lose out?

That all depends. The Department for Work and Pensions argues that the auto-enrolment plan will "give millions of people the opportunity to save into a pension with a contribution from their employer" and help the country to cope with the economic strain of an ageing population.

And it is true that workers who have not made any provision for their retirement so far are likely to be better off later on as a result of the new regime.

However, the Association of Consulting Actuaries (ACA) expects one in three larger companies to reduce their pension contributions to workers in response to the new rules.

ACA chairman Stuart Southall said: "It appears the austerity message has been grasped by many private sector employers as they begin to focus on the potential costs of the pension reforms around the corner."

Prudent savers who have been building up funds via their employers' pension schemes consequently face losing out to help those who have made no effort to save in the past.
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