Pensions shake-up offers cash for delaying retirement

Staff who work until they are 70 will be given a £20,000 lump sum by the Government under plans to encourage people to retire later.

Announcing sweeping reform of the pensions system, ministers signalled the end of automatic retirement at the age of 65, with incentives built into state and occupational pensions for older workers.

Andrew Smith, the Secretary of State for Work and Pensions, also unveiled a shake-up of the labyrinthine tax system on pensions, and promised legislation against age discrimination.

From 2006, recruits to the state sector, such as teachers, nurses and civil servants, will see their retirement age raised from 60 to 65. Mr Smith warned that millions of employees would have to save more or work longer to build up a big enough sum to live comfortably in retirement. But with some pensions experts calculating Britain's savings shortfall at £27bn, he stopped short of raising the state retirement age or of forcing workers to pay into a second pensions savings scheme. He angered unions by failing to announce tough action against firms that wind up final salary pensions schemes.

As The Independent revealed yesterday, people who defer taking their state pension will receive a 10.4 per cent increase in their weekly pension payment for every extra year they work. Alternatively, they will be able to claim a lump sum, such as £20,000 for single people who work until 70 or £30,000 for couples.

Mr Smith announced the abolition of rules preventing people in occupational schemes from working after retirement and drawing their pensions. However, the minimum age at which benefits can be drawn from a pension scheme will be raised from 50 to 55 by 2010.

Mr Smith told MPs that some three million people were not setting enough money aside for when they quit work. He said: "If people want to see continuing rising standards of living in retirement, they either have to save more, work longer or a mixture of both."

Rejecting calls for the state pension age to be raised, he said the move would disproportionately hit lower-paid workers. He repeated the Government's opposition to forcing workers to save money for their retirement, but said the option will be left open and be considered by an independent pensions commission to be headed by Adair Turner, the former director-general of the Confederation of British Industry.

"The test will be whether with this radical strengthening of our approach, employers and employees can rise to the challenge voluntarily or whether we will need to introduce more compulsion," he told the Commons. In an effort to replace "fat cat" payments to retiring company directors, the current limits on annual pension contributions will be replaced by a single, lifetime limit of £1.4m or £200,000 a year. Above those limits, which the Government said applied to only 1 per cent of workers, people would no longer be able to claim tax relief.

In other moves announced by Mr Smith: The self-employed will be offered the chance to opt in to the state second pension; a new pensions regulator will act against fraud and maladministration; there will be stronger protection for members where employers wind-up schemes; the existing eight pension tax regimes will be replaced by a single, unified set of rules; and the tax-free lump sum which people can take on retirement will be set at 25 per cent of the value of their individual pension fund.

David Willetts, the shadow Work and Pensions Secretary, denounced the Green Paper for containing "too many old ideas, rehashed and relaunched". He added: "Because you haven't got a solution, you pretend there is no problem." Roger Lyons, the joint general secretary of Amicus, said: "This will condemn millions of people to poverty in their old age. The real issue is that pensions are under attack by employers and not enough is being done to protect them."

John Edmonds, the general secretary of the GMB, said: "We won't stand back and let the Government press-gang millions of public sector employees into working until they drop."

However, the CBI said the Green Paper was a "useful first building block" for stabilising the pensions system.

Case study - Fred McCarthy, Aged 66

Fred McCarthy is delighted the Government wants to make it easier to work beyond the official retirement age of 65.

Aged 66, he has been frustrated for the past 18 months because he can work only 16 hours a week at the Meadowlees home for people with learning disabilities in Long Levens, Gloucestershire.

He said: "I think it's important to be allowed to work. I'm perfectly fit and it's about time the Government did something for people who can work. If there was a lot of unemployment I would be the first to step down, but as it is we're really stuck for staff here. We get outside help, but they don't know the residents as well as you do if you are working here all the time."

Mr McCarthy, a residential social worker, had a NHS pension, but it was only enough to pay him a lump sum. Otherwise he is dependent on the state pension of about £100 a week. Being allowed to work full time would help the home's staff shortages.

His wife, Ann, is over the female retirement age of 60 but is allowed by her employer to work as a warden of another retirement home with 43 residents. Her job comes with a tied home, but beyond that she receives only the minimum wage. "I can understand people wanting to retire," Mr McCarthy said, "but if you are reliant on the state pension it's a pain."

The McCarthys like to go on cruises twice a year, but are acutely aware that if they could not work they would have to give that up. The new proposals seem set to give the McCarthys, and thousands of people in a similar position, the confidence to be able to splash out on such luxuries in future.

William Kay