Threat of 'two-tier' UK pensions

A comfortable retirement could depend on the type of pension held

The UK is heading towards a two-tier pension system, according to a report from fund management firm Fidelity.

A gulf is developing in the retirement incomes of people who were members of a final salary scheme and those who had a defined contribution pension plan.

Fidelity said final salary scheme members could expect an average annual pension income of £30,500 before tax.

This compares with a projected average income of just £13,200 for members of defined contribution schemes.

Ultimately, this could mean that many workers may have to retire with a pension lower than the current level of the minimum wage.

"The gulf between the retirement expectations of defined benefit (final salary) and defined contribution pension schemes is astonishing," said Simon Fraser, president of institutional business at Fidelity.

He added that people were not paying enough into their defined contribution pensions.

Changing trends

There has been growing unease amongst pension experts at the disparity in UK pension provision.

Final salary pension schemes - which pay an income relating to length of service and the worker's salary at the end of their career - have been rapidly disappearing amongst private sector firms.

This final salary model has been replaced by defined contribution schemes.

Under a defined contribution scheme, workers pay money into a pension fund which is then used to buy an annuity - a financial product which pays out money each year during retirement.

The ultimate size of pension income can vary depending on how well the pension fund grows.

Public sector workers still, in general, enjoy access to final salary pensions.