Firms switching pensions from final salary to defined contribution schemes are costing average earners £38,000 to replace lost benefits, according to a new survey.
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Private employers are closing final salary schemes to save money – but average earners are losing the cash as the difference in the value of their pension pots over five years.
The result is companies are saving around £1.27 billion a year in pension contributions, while average earners are losing £2,192 of pension income, estimates the research by pensions firm Key Retirement Solutions.
To make up the cash, workers need to save an extra £38,000 to buy an annuity that would provide the lost benefits.
But most have no way of making up the lost contributions and are even cutting their own retirement savings by £267 million a year.
How the switch affects pension pots
Figures from the government suggest around 500,000 workers a year are switched out of lucrative final salary schemes to defined contribution pensions.
This leaves them losing tax-relieved contributions into their retirement funds and instead of receiving a pension based on their salaries when they give up work, they receive lower pension payments based on stock market performance and low paying annuities.
Analysis by Key Retirement Solutions reveals average employer payments into final salary pensions are 14.2% of an employee’s earnings, while workers also pay in 4.9% of their pay.
However, the figures drop to contributions of 6.6% for employers running defined contribution schemes – and just 2.2% by workers.
The firm’s group director Dean Mirfin said “Private firms are dropping final salary schemes because of the cost of funding the pension, but the affect this is having on workers belonging to the schemes is misunderstood.
Less retirement cash
“Final salary schemes were the norm but are now a rarity and anyone in such a scheme should count themselves lucky.”
He explained the combination of lower contributions into defined contribution schemes means workers on an average salary of £26,312 for five years lose around £38,000 in the value of their pension fund.
“Average workers would have to save an extra £7,600 a year or 29% of their earnings to make up the lost money, although a return on investment could make up some of that ground,” he said.
“Not many workers on average pay have the financial resources to save at that level, so end up with less cash in retirement.”
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