Pension savings neglected by workers

More than one in 10 workers (16 per cent) who have a pension say that during the past five years they have reduced the amount they contribute or have stopped saving into it altogether, according to new research from Prudential.

The decision by some to stop paying into a pension could mean a rise in pensioner poverty in years to come as the number of people who expect to rely on state pensions and their own savings is also set to rise to 27 per cent over the next 10 years compared with 22 per cent of those retiring this year, according to Prudential's research.

Martyn Bogira, Prudential's Director of Defined Contribution Solutions, said: "It's worrying that many people who have been working for years and saving for retirement seem to have given up hope and stopped paying into their pension. This is the last thing they should be doing.

"It's also really worrying that many people either planning to retire imminently or within the next decade still believe the state will support them when we know that, for many people, this just won't be the case."

Decline of final salary schemes

Prudential's research also reveals that two in five people (42 per cent) who said they planned to retire this year will have the majority of their pension savings in a final salary scheme while the figure falls to one in three people (35 per cent) for those due to retire over the next 10 years.

This decline can be attributed to the continuing closure of final salary schemes to new members which increased from 49 per cent closing in 2006 to 50 per cent in 2007 and to 53 per cent in 2008.

And, according to Prudential's research, 9 per cent of people have moved out of final salary schemes during the past five years, either because employers have closed them down in favour of defined contribution pensions, or because they moved jobs and found their employer only offered a defined contribution arrangement.

But reliance on defined contribution schemes to provide workers' retirement income is set to remain reasonably stable, with the research showing that 12 per cent of people who expect to retire in 2009 and 14 per cent planning to retire within the next 10 years will have the majority of their pension savings in a defined contribution scheme.

‘Disturbing' developments

Martyn Bogira continues: "Although it has been well documented that final salary schemes are in decline, our research has not shown a corresponding increase in defined contribution scheme participation, which implies that people are reducing contributions or stopping paying into pensions altogether. This is a disturbing development.

"With the growing body of evidence suggesting the state pension will be inadequate for many people in old age and with final salary schemes disappearing, now is the time for people to take advantage of the pension schemes which are available to them. Company or personal pension schemes really are the bedrock of a financially secure and rewarding retirement, and pension contributions are also tax efficient.

"Take the opportunity to pay as much into your pension as you possibly can and talk to your employer about your pension options. But the most important thing is don't give up and don't put it off. Paying into a pension is not something you can either afford to abandon or delay."

The cost of delaying pension payments

A worker who puts off paying into a pension until they are 35 could end up with a pension pot at age 65 worth nearly £40,000 less than if they had started paying in when they were 30.

Delaying 10 years could double the amount needed to save, which means these people may have to save more later in their working lives, if affordable, or get much less to live on when they retire.

The figures show an estimated pension fund, based on the individual shown starting a pension and paying £100 per month and retiring at age 65.