UPDATE 1-UK proposes reduced protections for final-salary pension schemes

(Corrects name in paragraph 9 to 'Aston' from 'Ashton')

* UK mulls end to inflation protection for some private pensions

* Other pensions may see greater income guarantee

* UK inflation-linked bond prices fall on news

By David Milliken

LONDON, Nov 7 (Reuters) - Britain's government proposed on Thursday to reduce protections for employees who are guaranteed a salary-linked retirement pension by their employer, in a bid to stop companies shutting such costly schemes altogether.

State pensions in Britain are low compared to average earnings, so for many Britons much of their retirement income will come from a pension provided by their employer.

In the past, pensions were often linked to a percentage of final or average salary, but such schemes are now rare outside the public sector due to their high and uncertain cost for employers.

Instead it is now more common for firms to contribute a fixed amount towards an employee's individual pension pot, which will offer an unpredictable income in retirement dependent on investment growth and long-run interest rates.

Britain's Department for Work and Pensions said that for new pension schemes and future payments into existing ones, employers should be allowed to remove inflation protection and automatically raise pension ages if their staff live longer.

Staff who left their employer before retirement could lose additional rights, the DWP proposed.

"Final salary pensions have been in long-term decline and if we do not act it could disappear altogether," said pensions minister Steve Webb. "We want to help the best employers offer good alternatives including new forms of salary-linked pensions."

For pensions into which employers make a fixed contribution, the government said it was looking at legal changes to allow financial services companies to offer staff some degree of guaranteed income.

Nigel Aston, who manages defined contribution funds for investment firm State Street (Frankfurt: ZYA.F - news) , said he welcomed this part of the government proposals.

"Giving individual savers increased predictability of potential outcomes ... in terms of retirement income is to be applauded," he said. "Whether or not this is best achieved through a 'hard guarantee' should certainly be explored."

Prices for long-dated British index-linked government bonds fell sharply after the announcement, as financial analysts warned the proposed changes could reduce the need for British pension funds to purchase inflation protection.

RBC (MCX: RBCM.ME - news) fixed income strategist Sam Hill said it may take some time for the market to accurately assess the likely impact on demand for index-linked gilts, however, as pension funds will still have to provide inflation protection for existing assets.

"It is understandable if the announcement leads to some underperformance in long-dated linkers as people chew this over," Hill said.

* To see the government consultation paper, go to: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/255541/reshaping-workplace-pensions-for-future-generations.pdf (Additional reporting by Christina Fincher and Sinead Cruise; Editing by Catherine Evans)