People postponing retirement saving until the white paper reforms come into effect in 2012 could lose up to 50% of their income.
Figures put forward by Scottish Equitable reveal delaying saving for six years until the introduction of personal accounts will reduce pension income between one third and one half depending on a person’s age.
The company, part of Aegon UK, says this scenario is entirely possible as the uncertainty of future pension reforms could put many people off saving, leading to a 39% cut in future pension income for a 30 year old.
Scottish Equitable says people should not be lulled into a false sense of security over the state pension reforms, as while the changes already announced are to be welcomed, most people will find they still need to save more to close their personal savings gap.
It reveals a six year delay for a medium earner, on £23,000 per year and contributing 8% of earnings above the lower earnings limit, could see their income drop from between 36% to 56% over the next six years.
|Current Age||Pension as percentage of earnings if starting saving now||Pension as percentage of earnings if delayed till 2012||Reduction in pension as a result of 6 year delay|
Based on 7% growth, 4% earnings inflation and charges of 0.75% per year.
Rachel Vahey, head of pensions development at Scottish Equitable, says pension reform is an important step forward in highlighting the need for long term savings and the choice people will have to make between working longer or saving more.
But she says there is a risk people may believe the changes to the state pension alone will be sufficient for their retirement, while another concern is as 2012 is the year it all starts they may decide to put saving on hold until then, meaning they are worse off as a result.
Vahey adds: “Most people won’t realise a six year delay could cost between one third and one half of their eventual pension income. It’s important they start thinking about their financial future and start saving sooner rather than later, using whatever means are right for them.”
"Advisers should get their clients engaged in planning for the future and as an industry we should build momentum behind this," continues Vahey.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
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