Work into your seventies under pensions shake-up …(Or Till Death…)
Millions of employees who are not saving for their retirement will be enrolled in company schemes under a radical shake-up of pensions which eventually could see most people working into their seventies.
By Andrew Porter and Rosa Prince
In a landmark announcement intended to herald a new era of shorter but wealthier retirements, the Government will encourage people to work for longer by making it illegal for companies to force staff to give up work at 65.
At the same time, the age at which employees can claim the state pension will rise to 66 as soon as 2016 for men — 10 years earlier than the last government had decreed.
The Coalition is to consult on the most appropriate pace at which to increase the retirement age even higher in line with rising life expectancy.
The outcome is likely to be that, by the second half of the century, most people will work into their seventies.
In return, workers would receive more generous state pensions boosted by membership of company schemes, into which employees will be enrolled unless they opt out. Those reliant on state pensions will benefit from the restored link between pensions and earnings announced in this week’s Budget.
Life expectancy is currently 77.4 for men and 81.6 for women. At present rates, there will be three people in their nineties for every newborn by 2050.
Iain Duncan Smith, the Work and Pensions Secretary, told The Daily Telegraph that the radical pension reform he will oversee was designed to “reinvigorate retirement”.
“People are living longer and healthier lives than ever, and the last thing we want is to lose their skills and experience from the workplace due to an arbitrary age limit,” he said. “Now is absolutely the right time to live up to our responsibility to reform our outdated pension system and to take action where the previous government failed to do so. If Britain is to have a stable, affordable pension system, people need to work longer, but we will reward their hard work with a decent state pension that will enable them to enjoy quality of life in their retirement.
“That is why we are issuing a call for evidence on moving the state pension age to 66, and thereafter plan to take a frank look at the relationship between state pension age and life expectancy.”
The announcement coincides with John Hutton, the former Labour minister, beginning a review of public sector pensions which is expected to recommend that staff contributions increase substantially as soon as next year.
David Cameron also disclosed yesterday that he would sacrifice the generous prime minister’s pension he would be entitled to on leaving office, instead drawing the same pension as Cabinet ministers, which currently stands at around £19,000 a year. Last month, Gordon Brown sacrificed the perk, worth £66,461 a year, which is paid to prime ministers the moment they leave No 10 regardless of how long they have served.
With the ageing population putting an ever greater strain on services such as the NHS and social care, Mr Duncan Smith, who in opposition chaired a think tank looking at radical welfare reform, said he was already persuaded of the need to raise the retirement age faster and further than the previous government.
Under Labour, retirement was due to equalise for men and women at 65 by 2020, rise to 66 between 2024 and 2026, 67 between 2034 and 2036, and 68 between 2044 and 2046.
Following the Budget announcement that benefits will need to be cut drastically, Mr Duncan Smith will seek evidence to show why the retirement age needs to rise yet further, and is looking at indexing it to life expectancy, as is done in parts of Scandinavia.
When the male state pension age of 65 was set in 1926, three out of five died before they were able to claim it. In contrast, projections show that, within 25 years, a quarter of the population will be over 65. The proportion of employees saving into a private pension has fallen from 46 per cent in 1997 to 37 per cent in last year.
In keeping with the Coalition’s drive to encourage people to take more responsibility for themselves, up to 10 million employees who currently fail to save for their retirement will be automatically enrolled into a company scheme.
A three-month review will be held to test whether the last government’s plans for auto-enrolment are viable. It will check that all is in place to help small firms in particular prepare for the mass enrolment of millions of workers between 2012 and 2017.
Steve Webb, the Pensions Minister, said that larger companies would be the first to auto-enrol staff, to ensure that “teething problems” were out of the way by the time that family firms were forced to provide pensions.
Under Labour’s plans, which were due to come into force from October 2012, firms must either pay a minimum of three per cent towards a defined contribution scheme or a new government pension plan called the National Employment Savings Trust, or NEST.
Saving would not be compulsory for employees, who would be able to opt out, but official projections estimate that between five and nine million of the 10 million without retirement savings would remain in a scheme after auto-enrolment, paying a minimum of one per cent of earnings.