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Warning of shortfalls over move to DC plans

The millions of employees who have been moved from defined-benefit to defined-contribution schemes are in the dark about the retirement shortfall they will face, according to Towers Perrin.

The benefits consultancy says that many people are unaware of the deficit they face and must first establish the extent of the shortfall and work out how they will make up the loss. It says this could involve people making difficult decisions and sacrificing their lifestyle.

Towers says a 22-year-old single woman on £12,000 a year who was due to retire on a pension of two-thirds of her salary would have to contribute an extra 7 per cent of her salary to get the same pension through the new moneypurchase scheme.

The company says this would mean the woman sacrificing her annual holiday and eating out with friends.

Principal Robert Ivey says: “The plain truth is that most people remain blissfully una-ware of the true extent of the financial hardship they may suffer in later life. Even if they were to face reality, it is unlikely that they would be prepared to make big enough sacrifices to allow them to save the extra they need.

“However, it may not all be doom and gloom. A realistic assessment of the income needed in retirement might well show that the level of pension they are aiming for is over-ambitious.

“They will probably have paid off the mortgage, the children will be off their hands and expenses such as work clothes and the cost of travel will no longer in incurred.”

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