Revenue calls a halt to retiring under 55

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The Inland Revenue will next month signal its intention to quash the hopes of anyone who wants to retire before they are 55.

Proposals expected to be published along with the Chancellor's pre-Budget statement on 10 December will change the tax rules on pension schemes. Anyone who retires before they are 55 will no longer be able to draw a pension tax free.

The move is an attempt to limit the pensions crisis which has seen companies running up billions in pension deficits and closing final salary schemes. It is also a recognition that people are living longer and will need to work for longer as well.

The new rule is expected to come into effect in 2005 and apply to those retiring after April 2010.

Currently, the Revenue allows people to retire at any age between 50 and 75. It signalled it might raise the minimum age for retirement in a discussion document issued a year ago, but this was overshadowed by a more radical proposal to increase the general age of retirement from 65. That plan was dropped by the Secretary of State for Work and Pensions, Andrew Smith, in the summer. However, the Revenue, which comes under the wing of Gordon Brown, is carrying on with moves to curtail early retirement.

The Government's intentions were revealed when it proposed upping the early retirement age for the Local Government Pension Scheme (LGPS), the UK's largest fund. According to trade magazine Pensions Week, early retirements from the scheme have put extra pressure on local councils which fund it.

Announcing the change, the local government minister, Phil Hope, said: "The Government wants the LGPS to remain efficient and effective, providing reasonable pensions at an affordable cost."

Pensions experts say the change could cause administrative headaches but will have little financial effect. "It is simply the Government making a point that people will have to stay in the workforce for longer," said Mark Duke of remuneration experts Towers Perrin.

Raj Mody of pension consultants Hewitt Bacon & Woodrow pointed out that most companies were already adjusting the rules of their pension schemes to discourage early retirement: "It is not sustainable to expect to work 30 years and then have 30 more years of retirement."