Hughes threatens 'trouble' for the coalition over treatment of poor

Liberal Democrats' disquiet at Osborne's Budget grows

The unity of the coalition government was under strain last night as the deputy leader of the Liberal Democrats threatened to try to rewrite parts of George Osborne's austerity Budget.

Simon Hughes spoke out amid fears on his party's back benches that the poorest families would bear an unfair share of the dramatic squeeze on public spending and benefits.

Plans to raise VAT to 20 per cent in January and a threat to the winter fuel allowance paid to pensioners have intensified the jitters among Nick Clegg's MPs over the tough economic medicine being administered.

The Government announced plans yesterday for a fundamental overhaul of a pensions system it condemned as "outdated and inadequate". The state pension age will be raised to 66 as early as 2016 and private sector workers forced to sign up to company pension schemes. It could in the decades ahead be raised to 70 and beyond.

Mr Hughes told the Commons there would be "trouble" if ministers attempted to renege on their commitment to protect allowances paid to the elderly. He said: "The coalition deal is a deal and what has been agreed must stand – and there cannot be any unpicking of items in that deal, otherwise the whole thing risks falling apart.

"The deal has to be that we go down the committed road. We signed up and the Conservatives signed up, all compromising where appropriate, and that must stand. If there is any suggestion that it changes, there clearly would be trouble."

He made clear his qualms about the rise in VAT, which he warned was "less progressive" than income tax. He accepted the increase was necessary to "fill a huge gap Labour has left us" and would support Mr Osborne's package in next week's Second Reading vote on the Budget.

But he warned that backbench Liberal Democrats could attempt to amend key parts of the Budget later when it faces line-by-line scrutiny in the Commons. "If there are measures in the Finance Bill, where we can improve fairness and make for a fairer Britain then we will come forward with amendments to do that because that is where we make the difference."

His anxieties are shared by Liberal Democrat MPs who have privately discussed their tactics in responding to the Budget. Bob Russell, MP for Colchester, has already said he would find it difficult to vote in favour of the VAT rise. Tim Farron, the MP for Westmorland and Lonsdale, who is on the left of the party, has said he supports the Budget plans for now – but that the coalition must be prepared to look at other measures if the economy plunges into a double-dip recession.

Mr Osborne says he is looking for extra benefits cuts on top of the £11bn set out in the Budget – cash that would be used to limit the savage spending cuts to be announced in October.

Iain Duncan Smith, the Work and Pensions Secretary, signalled that benefits to the elderly could be in the Government's sights – even though they were guaranteed in the coalition agreement. Asked about the "sustainability" of the winter fuel allowance and free bus travel for pensioners, Mr Duncan Smith replied: "That is something I have to look at obviously."

Under the pension plans set out yesterday, the state pension age for men would rise from 65 to 66 from 2016 – a decade earlier than the last government was planning. Ministers raised the possibility of increasing the pension age to 70 and even older.

Only one-third of private sector staff are currently in pensions schemes. The Government wants them to be automatically enrolled, but allowed to opt out.

The number of full-time undergraduates will plummet by 20 per cent over the next five years, it was forecast yesterday. The dramatic cut – brought about as a result of rising debts and spending restrictions – would mean nearly 100,000 fewer students taking up full-time university courses a year.

The forecast was made at a conference in London yesterday by Chris Morecroft, chairman of the Association of Colleges' higher education group.

Explainer: Raising the pension age

What changes is the Government making?

The coalition plans to raise the pension age in 2016 to 66 for men and from 2020 for women. There is also talk of increasing the pension age to 70 or more over the next few decades, replacing the previous government's plans to increase the state pension age to 68 by 2046. The coalition also intends to abolish the existing default retirement age of 65, which means employers won't be able to dismiss workers just because they reach a certain age. Finally, the Government has confirmed plans to auto-enrol people into workplace pensions from 2012.

What have they not said today?

The subtext of today's announcements – and similar pension announcements from the previous government – is that if you don't start saving for your retirement now, you'll end up practically penniless with few choices when you finish working. The message from Iain Duncan Smith yesterday was: "Everyone needs to take responsibility for achieving the income in retirement they aspire to."

I'm in my twenties. Do I really need to think about this now?

It is a long way off but, presuming we all live that long, the fact that you may have to work longer before you can draw a state pension is not a cheery thought. However, if you are in your twenties you're in the best position to avoid having to work until you're 70. Saving now for your retirement will allow you to build up a decent nest-egg to give yourself the choice of retiring earlier – much earlier – if you wish.

Doesn't it discriminate against manual workers who might be exhausted by 60?

The National Pensioners Convention (NPC) warns that raising the retirement age will see some people being forced to work until they drop. "The wealthier you are, the longer you live, so raising the retirement age therefore is a direct attack on the very poorest in our society," says Dot Gibson, general secretary of the NPC. According to the latest NHS figures, men in Blackpool live to 73.2 years on average, which would give them just over three years to enjoy their retirement. Men in Kensington and Chelsea, by contrast, have a life expectancy of 84.7.

Will it lead to fewer jobs for graduates, as not as many older people will be retiring?

That's the concern of some. Compared to today, the number of people over 65 will be half as many again in 2030, and will have doubled by 2060, according to the Department for Work and Pensions. If more are being forced to work, there could be fewer jobs for graduates. But a more likely scenario is that today's young people will build up decent pension pots through the auto-enrolment scheme, which will force employers to set up retirement schemes. If so, their savings should be decent enough for them to be able to retire earlier, meaning they won't need to rely on the paltry state pension payouts which look likely to be on offer at the time. Then if more people retire early, more jobs will become available for graduates.

I'm 64 and have already made plans for retirement. What happens if it goes up to 70?

It won't happen in your working lifetime. In fact you'll be retired by the time the age climbs to 66. The increase will only hit people who are due to retire at 65 from 2016 onwards.

Do I actually have to do anything or is this all automatic?

With regards to the state pension, which is what this is all about, you need to do nothing. It will all happen automatically and you'll be told if your retirement age is changing. However, the important message for anyone in their twenties, thirties or forties is to start saving now for your retirement, if you haven't already. If you don't, you'll be left with very little choice when you reach your late sixties.

I have a pension but have no idea what I've accumulated so far. How do I find out?

You need to contact your pension providers. That could be your current employer's scheme, or that of previous firms you've worked for. If you have a private pension you'll need to contact the bank, life assurance company or building society that administers it. If you've lost track of your pension, contact the Pension Tracing Service.

Simon Read, Personal Finance Editor