ARE pensions past their sell-by date?

There is growing scepticism about whether auto-enrolment into a pension at work, which starts later this year, will achieve the government's aims – particularly if younger workers decide to opt out.

At present only 5% of workers between 18 and 34 are saving for retirement, according to a survey this month by Nationwide.

Meanwhile, existing contribution-based pensions have come in for heavy criticism recently in two damning reports from the National Association of Pension Funds (NAPF), which champions dwindling final salary schemes.

It adds to a groundswell of expert opinion that pension saving must be made more attractive.

Starting in October, firms must begin automatically enrolling their workers into a new work-based pension, the National Employment Savings Trust (NEST), unless they already provide a suitable pension scheme. Both employers and employees will have to contribute to the scheme and the money will be invested. The amount of pension that workers will get at retirement will depend on how the investments perform, and on the annuities purchased.

But the NAPF has highlighted the fact that many people are receiving less pension income than they should from their present contribution-based arrangements due to low annuity rates and high charges.

The NAPF's first report at the beginning of February calculated that people are currently missing out on £1 billion of pension a year by choosing the wrong annuity. It predicts that this figure will accelerate threefold after auto-enrolment unless the annuity market is reformed.

A week later another report by the Pensions Policy Institute for the NAPF pointed out that employees with stakeholder pensions, supposedly the model low-cost workplace pension, are paying more in charges than they need to. Stakeholder pension charges are 1.5% for the first 10 years, then 1% thereafter. But by an employer negotiating a pension with the long-term 0.3% rate offered by some major providers, a saver could increase their income in retirement by 17%.

Besides switching to a cheaper pension plan and shopping around for the best annuity, other suggestions to ensure you get more for your money include using the whole of a pension pot to buy an income rather than taking a tax-free lump sum, and working an extra year after state retirement age.

The new NEST pension scheme will be low cost, charging 0.3% per annum. However, whether it will have the desired effect of increasing pension savings is being questioned. It will not be compulsory, as workers can choose to opt out. Research carried out by insurer Aviva among business advisers has found that more than half think that up to 30% of UK workers could opt out, with the largest proportion of opt-outs in the under-35 age group. The widespread view is that younger workers have other things to worry about, a view echoed by this age group themselves, whose main goals are to buy a house (36%), pay off debts (34%) and pay off their mortgage (20%), according to Aviva.

Some experts are questioning whether the whole concept of pensions needs a radical overhaul. The head of the Association of British Insurers, Otto Thoresen, has suggested that to make pension savings more relevant for young people, it might be possible to use the money to pay off student debt or help them onto the housing ladder. Dr Ros Altmann, pensions expert and director general of Saga, says such creative thinking from the industry is "long overdue".

She argues: "The pensions 'locked box' is not suitable for many of today's workers. As we head towards auto-enrolment, with millions of low earners being forced into pension savings from which they have to choose to opt out, we urgently need to also consider how to redesign pensions so that they suit more people."

Dr Altmann says employers are currently required to contribute only to a worker's pension, not to any other form of savings such as a workplace Isa. "Employers often say they are happy to help pension savings, but do not want workers to just fritter their money away. Such objections can be overcome in a number of ways. For example, we could design auto-enrolment so that employers' money (and the tax relief) is accumulating in a pension but the worker can access their own contributions for other uses. This would mean savings will fit far better with people's lives - I hope that we may be seeing the first signs of the industry itself recognising the need for change."

Lynsey McCann, 22, works for a major retailer in Glasgow as part of the store management team, but is not paying into a pension. "I think it depends a lot on where you are in your career," she says. "I joined as a part-time worker, and because I graduated in human resources I am looking to the longer-term. They do have a pension scheme in place, but I don't think there is a lot of information for people at that age."

In any case, Lynsey and her partner Anthony Madden, a plumber, have only just bought a £98,000 house in Baillieston and started paying into a mortgage. She says that is their priority, and paying into a pension at work would only start to make sense once she felt settled in her career.