The Superannuation Bill, which receives its second reading in the House of Commons today, would cap payoffs at one year's salary or 15 months for voluntary redundancies. At present, civil servants can get three years' salary, with those recruited before 1987 entitled to as much as six years.
Cabinet Office Minister Francis Maude said the Government had a "duty to the taxpayer" to change a system which is far more generous than schemes elsewhere in the public and private sectors.
But the Public and Commercial Services union threatened to challenge the move in court, accusing the Government of trying to tear up workers' contractual rights at a time when they are most vulnerable.
Negotiations on reform to the system under the previous Labour administration were blocked after 18 months when the PCS won a legal challenge in the High Court.
Mr Maude insisted that the proposed change would help protect low-paid workers, by making it affordable for the Government to remove senior executives on high salaries, who would otherwise be too expensive to sack.
Thousands of Civil Service posts are expected to be scrapped in the period after next month's spending review, as Whitehall department budgets are cut by an average 25% as part of the Government's bid to pay down the bulk of Britain's state deficit within five years.
Mr Maude told the BBC Radio 4 Today programme: "We want there to be a proper agreed long-term settlement here, and particularly one that gives proper protection for low-paid workers.
"The real mischief of the way the system works at the moment is that, because it is so incredibly expensive - out of all proportion expensive - for the Government to make redundant very senior people who have been there for a long time, the result is that, when savings have to be made... more lower-paid workers will lose their jobs, because frankly they are the ones who are cheaper to make redundant.
"We want something that gives real protection to lower-paid workers, who actually get discriminated against at the moment."
Mr Maude accepted that the change would not be popular among civil servants: "No-one likes changes that make their own position less satisfactory."
But he said the current system was far more generous than the statutory redundancy payments available to most low-paid people in the private sector, which are no more than 32 weeks' pay capped at £380 a week - the equivalent of around £11,000.
Civil servants' present arrangements were "completely out of kilter with anything in the rest of the public sector, let alone the private sector", said Mr Maude, adding: "We have a duty to the taxpayer."
But PCS general secretary Mark Serwotka said his union would challenge the Bill in court.
He said only a "handful" of civil servants enjoyed the full pre-1987 redundancy arrangements, and many low-paid workers would lose out under the Government's proposals.
"This is really about low-paid civil servants whose jobs are more vulnerable than at any other time that I can remember being told that the Government is going to slash their contractual terms, even though the High Court has twice found that it is illegal to do so when the previous government tried to do it," Mr Serwotka told Today.
"Yes, this is a package that is more generous than others, but historically the reason for that is that Civil Service pay for comparable jobs is lower than other parts of the public sector or the private sector.
"It is an outrage that the Government is abusing its position as an employer of civil servants. What it should do is sit down and negotiate with trade unions on a new scheme that is compatible with age discrimination legislation, but one that recognises that twice in the High Court a judge has said that you can't remove people's accrued rights without the agreement of the union."
Negotiations which were currently under way over redundancy pay were not "genuine" because the Government was "holding a gun to unions' heads" by rushing the legislation through Parliament in order to impose the less generous terms within months, said Mr Serwotka.
Labour's Tessa Jowell said: "We all believe that the Civil Service Compensation Scheme needs to be reformed and that its costs need to be reduced. But reform needs to be fair.
"The Superannuation Bill fails to meet this test. It provides inadequate protection for some of the lowest-paid and longest-serving public sector workers.
"In putting it forward, the Government have acted unilaterally without consulting their employees, seeking to circumvent proper parliamentary scrutiny.
"No protection is offered for the lowest-paid, with a junior official in a job centre receiving no more assistance than a permanent secretary of a Government department.
"We believe that the principles of the February 2010 scheme, introduced by the previous Government, provided a basis for a fair way forward. This would make a substantial contribution towards tackling the deficit, while ensuring that the reasonable expectations of Civil Service staff, particularly the lowest-paid, are met."
Labour's Tessa Jowell said: "We all believe that the Civil Service Compensation Scheme needs to be reformed and that its costs need to be reduced. But reform needs to be fair.
"The Superannuation Bill fails to meet this test. It provides inadequate protection for some of the lowest-paid and longest-serving public sector workers.
"In putting it forward, the Government have acted unilaterally without consulting their employees, seeking to circumvent proper parliamentary scrutiny.
"No protection is offered for the lowest-paid, with a junior official in a job centre receiving no more assistance than a permanent secretary of a Government department.
"We believe that the principles of the February 2010 scheme, introduced by the previous Government, provided a basis for a fair way forward. This would make a substantial contribution towards tackling the deficit, while ensuring that the reasonable expectations of Civil Service staff, particularly the lowest-paid, are met."
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