The furore over pensions gathers apace. Today, workers from 11 Unilever sites will stage a demonstration outside Unilever House in London over the company’s plans to close its final salary pension scheme.

Yesterday, Unite – the public sector’s biggest union – rejected the Government’s latest proposals to reform local government pensions, after rejecting similar changes to the NHS scheme.

And last week Shell became the last FTSE 100 company to close its final salary scheme to new recruits.

For both public and private sector workers, the demise of the final salary pension scheme should not be underestimated.

In future, far fewer people will pick up their gold watch at 65 and then enjoy a life of lazy lunches and winter cruises, funded by a decent company pension. As we’re living longer, final salary pension schemes, which guarantee you an income based on your salary, are fading fast, and the state pension age is set to rise, too. Increasingly, pensions will be exposed to more unpredictable elements, be they inflation, annuity rates or stock-market performance.

Britain’s pension system has already been shown to be buckling. We now have the biggest “pensions gap” in Europe, according to Aviva. This gap is defined as the difference between the income people need for a comfortable retirement and the pension they are on target to receive. Worryingly, the insurer says British savers need to put an extra £10,300 a year into their pensions to close this gap fully.

In short, tomorrow’s pensioners will have to take more responsibility for their financial retirement, while many will have a hotchpotch of different types of scheme. Below we explain how the landscape is changing and how it might affect you.

Q Why are final salary pension schemes closing?

For most employees they are financially unsustainable. Increasing longevity is one of the pivotal reasons for this – and it is why the Government wants to overhaul public sector pensions.

Longevity is accelerating so rapidly that siblings born a year apart can now expect a six-week difference in lifespan. A baby born this year will, on average, live for more than 90 years and nine months. As a result, more than 11 million people alive today – 17.6 per cent of the population – can expect to live for more than 100 years. Pension schemes will struggle to fund these liabilities.

Employers ditching these pension plans are also concerned about unpredictable funding liabilities. If, for example, the stock market falls significantly, employers will have to put more into their pension schemes to plug any deficit and ensure pension guarantees can be met.

Q My employer has closed my final salary scheme and has put me in something called a defined contribution (DC) pension scheme.What is the difference?

Defined contribution schemes are fundamentally different from – and inferior to – defined benefit schemes such as final salary pensions. Final salary schemes give workers pensions based on their earnings. Many workers in these schemes typically accumulate 1/60th of their final salary for each year worked up to a maximum of two-thirds of salary.

With a DC scheme, your pension income depends on the amount you and your employer contribute, as well as charges, investment performance and annuity rates (these determine the income you get from your pension pot when you retire).

The nearer you are to your retirement, the less effect switching schemes will have on your final pension. If you are just five years from retirement, and have been a member of a final salary scheme for most of your working life, then only a very small proportion of your pension will be dependent on future stock market growth.

In contrast, if you’re in your early thirties, the lion’s share of your future pension will come from a stock market-linked scheme, rather than being based on earnings.

Q My employer is changing my final salary scheme to a career average scheme. Will I be worse off?

It depends. Your pension is still guaranteed but it will be based on average earnings rather than your final salary. For each year of service you are entitled to a greater proportion of your average earnings as a pension, up to two thirds maximum.

Those on lower salaries could actually be better off under a career average scheme. A worker starting on £15,000 and with a future earnings growth of 1 per cent above the Consumer Price Index each year would have a pension 21 per cent bigger than they would under a final salary scheme.

Q I’m in a DC company scheme so at least I’ll get a decent pension, right?

Don’t count on it. If you are in a DC scheme, do not take it for granted that it will generate a decent size pension pot. The level of contributions made by your employer (and yourself) is the key to a decent–size pension. If you are lucky enough to be in a final salary scheme, these contributions will total around 22 per cent of your salary. For workers in defined contribution (DC) schemes the average combined rate is around 12 per cent (8 per cent from the employer and 4 per cent from the employee).

The difference in contribution levels will be significant. For example, to buy an index–linked pension of £24,000 a year you would need a pot of about £500,000. A 27 year–old earning £40,000 who is putting 12 per cent of salary into a workplace pension would be salting away £400 a month, yet to get to £500,000 by the age of 66 they would need to be setting aside £550. If they were to leave it until the age of 35, the cost would increase to £800 a month.

Q What can I do to improve my chances of a better pension?

About four in five employees tick the box and opt for the so-called default option when choosing the fund for their company pension. Yet default funds are shrouded in controversy, because many have been, at best, second-rate performers, while others are heavily exposed to one asset class.

It makes sense to check out the options within your company scheme – it may offer a range of funds, some of which might be more suitable and diversified. It might offer a “lifestyle” fund, which aims to de-risk your fund as you get nearer to retirement by selling riskier assets such as shares, and buying lower-risk assets such as corporate bonds and fixed-interest investments.

Q How much should I be saving for a decent pension?

To give you an idea of the amount you need to save, a 30 year-old should be putting aside around £160 per month (assuming an annual growth rate of 7 per cent before charges and 2.5 per cent inflation) if they want a yearly income of £20,000 when they retire at the age of 65.

Delaying starting a pension can have a devastating effect on the size of your pension fund. For example, if a 30 year-old delays investing in a pension until they reach 40 and still expects to retire on £20,000 a year, they will then need to invest £370 a month.

By Paul Farrow