Workers lucky enough to be saving into a final salary pension scheme are in for a nasty shock. In a final salary pension scheme, a type of defined benefit scheme, your pension pot is determined by the salary you earn rather than the contributions you have made during employment.
But the Government is considering scrapping these so-called 'gold plated' funds and replacing them with Flexible Defined Benefit schemes which will be able to change the terms of your retirement savings plan if it does not have enough money.
Flexible elements would include increasing the scheme pension age, forcing employees to work for longer and not increasing payments in line with inflation.
"Under this new proposal workers could save diligently throughout their lifetime, only for the rug to be pulled out from under them at the last minute," explained Hargreaves Lansdown's Laith Khalaf.
"The government is trying to manage the decline of final salary pensions, but Flexible Defined Benefit schemes will be complicated, costly and will create huge uncertainty for pension savers about what pension income they can expect."
Inflation linking final salary pension schemes can almost double an employee's pension pot on retirement.
A £10,000 annual pension adds up to £250,000 over 25 years without inflation increases, but factoring in the current level of CPI at 2.7%, your pension pot would swell to £351,000 over 25 years.
If inflation spiked to 4% - which it has done in recent years - your inflation linked pension pot would grow to £416,000.
This is not the first time in recent years that the Government has announced changes to existing pension schemes. Pension payment used to be linked to the RPI measure of inflation, ordinarily slightly higher than CPI, but in 2011 this was changed.
Khalaf says that this constant tinkering has a negative impact on pension schemes - and on the perception of retirement saving.
"Employers are in the middle of implementing auto-enrolment, one of the biggest shifts in workplace pension provision ever embarked upon on the UK," he said. "Talking to them about Flexible Defined Benefits is about as useful as offering a marshmallow to someone fighting a fire. The DWP should be focussing its energy on making auto-enrolment work rather than carrying on with this wild goose chase."
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