Warning as pension funds are hit by £1bn fall

The amount of money contributed to pension funds dived by more than £1 billion during the past year.

A total of 17.96 billion was contributed to private pensions, including occupational schemes, personal pensions and stakeholders, during the 2009-10 financial year, down from 19.26bn during the previous 12 months, according to HM Revenue & Customs.

The fall was driven by a 940 million drop in the amount individuals contributed to the schemes, with the amount paid in by companies remaining broadly unchanged.

About 430,000 people stopped saving for their retirement through a private pension, partially explaining the sharp drop in contribution levels. But even among those who continued to set money aside, the average amount saved fell from 945 to 886.

Laith Khalaf, pensions analyst at financial adviser Hargreaves Lansdown, said: "Pension contributions are a tempting cost to cut when times are tough. But if they are never made good, this is a problem shelved rather than a problem solved. This decline in pension-saving highlights the importance of the auto-enrolment rules arriving in 2012."

The government is introducing new regulations from 2012 in an effort to encourage up to eight million people to save more for their retirement.

Under the move, all workers will be automatically enrolled into an occupational pension scheme after they have been with their employer for three months, although they will retain the right to opt out.

When the full changes come into force, individuals will have to save at least 4 per cent of their pay towards their retirement, with their employer contributing 3 per cent and the government topping this up with a further 1 per cent .