Pensions crisis 'could lead to tax rise of 5p in pound'

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Income tax could soar by 5p in the pound to head off a public sector pensions crisis, it was predicted yesterday.

Income tax could soar by 5p in the pound to head off a public sector pensions crisis, it was predicted yesterday.

Cuts in pension rights for teachers and thousands of town hall staff are being planned by the Government to address a funding black hole costing billions of pounds in public sector pensions.

Watson Wyatt, the firm of actuaries, claimed yesterday that the black hole amounted to £580bn, equivalent to 5p in the pound on the standard rate of income tax. The estimate is £200bn more than the Government has previously admitted.

A senior Treasury figure rejected the claims yesterday. "The Government's calculations are based on long-term liabilities in investment markets, as agreed with the independent and expert Financial Reporting Advisory Board, whereas the Watson Wyatt calculations are for some reason based on long-term liabilities in the nuclear industry," he said.

However, the Government published plans for sweeping changes to teachers' pensions yesterday and The Independent has learned that town hall staff could see cuts in their right to early retirement in an attempt to meet the rising cost of public sector pensions.

Under the proposals, teachers in England and Wales could continue working part-time beyond their usual retirement date, which is due to be extended to 65 in two years' time.

The School Standards minister, David Miliband said that savings were needed because pensioners were living longer. He has asked for teachers' views before final decisions are made.

Mr Miliband published a consultation paper in which he described "cost pressures associated with increases in life expectancy". He said it was necessary to modernise the pensions package to keep it "affordable and justifiable to taxpayers".

The Government has confirmed that the normal pension age for teachers will rise from 60 to 65 for new staff joining the scheme from 2006, and from 2013 for existing members.

Town hall staff also could lose their right to retire at 50 under government plans to cope with a pensions black hole for local authorities. The extent of the liabilities on local authority pensions is being assessed in a tri-annual review but council leaders have warned the Government that it could amount to many billions of pounds.

Local government sources said that the Government was considering two key options to cut the liabilities in the future by cutting pension rights. Ministers are considering ending the entitlement of town hall staff to retire at 50. Staff in future could be forced to wait until they are 55 before seeking early retirement. Ministers are also studying the option of abolishing the so-called "80-year rule" which allows staff to claim full pension entitlement when their years in service and their age add up to 80.