13m facing poverty in retirement

Patrick Collinson and Patrick Wintour Wednesday December 18, 2002 The Guardian

The government issued a grim warning to millions of middle-income workers to save more and work until 70 or face a poverty-ridden retirement as it unveiled the biggest overhaul in pensions policy for a decade yesterday.

Promising legislation to ban compulsory retirement ages and tackle age discrimination, the work and pensions secretary, Andrew Smith, shocked unions by announcing an increase in the retirement age for millions of public sector workers.

Mr Smith announced a sweeping overhaul of the tax regime for pensions, but rejected calls for a rise in the basic state pension. He also admitted that if the government's voluntary approach failed, compulsory pension saving may be necessary.

At the heart of the government's strategy is the end of early retirement, plus incentives to keep people in work - and saving for their pension - until the age of 70. Mr Smith said that as many as 13 million people are failing to put aside enough, confirming Britain's huge pensions "savings gap".

The campaign to end the "cliff edge" between work and retirement will be backed by legislation to ban compulsory retirement ages and encourage employers to keep staff on for longer. The retirement age for around two million civil servants, teachers and NHS workers will be raised from 60 to 65, although this will only apply to workers joining the services after 2006.

Employees in private companies will also be prevented from taking their pensions until they are 55, five years higher than current rules allow.

Mr Smith disappointed critics calling for an increase in the basic state pension, citing the huge burden faced by taxpayers in Germany. He insisted that public spending on pensions in Britain will remain stable at 5% of GDP "for the next 50 years". But in an unexpected move, he said anyone not taking their state pension until 70 could be rewarded with a 50% higher income or a £30,000 lump sum.

In sweeping changes to the private and company pension regime, the long-awaited green paper unveiled plans to replace the "incomprehensible maze" of eight tax regimes with just one, in the belief that simpler pensions will encourage more people to save. The myriad tax reliefs on private pensions will be replaced with a single lifetime limit of £1.4m of savings that will qualify for tax relief.

While pensions companies welcomed the simplification of rules, they condemned the lack of incentives to make people save. "We need some better incentives that this to kickstart the savings habit," a spokesman for Norwich Union said.

Mr Smith, acknowledging public concern over the collapse of many final salary-based company pension schemes, said there were only limited measures that the government could take without placing unacceptable burdens on employers.

There will be new protection for workers in companies which have been liquidated or gone bankrupt. Mr Smith also announced a regulatory body which will aim to uncover fraud and maladministration in company pension schemes.

In his Commons statement Mr Smith admitted that while "the case for compulsion has not yet been made", it may become necessary if voluntary encouragement fails.

Compulsion is the most contentious issue in pensions policy, with the government fearing a backlash against what may be seen as a stealth tax.

The decision yesterday to defer the issue by appointing a standing independent pensions commission, headed by Adair Turner, the former CBI chief, reflected tensions between the Treasury and Downing Street. The precise role and terms of reference of the com mission were still being negotiated as late as the weekend.

Conservatives, Liberal Democrats and many unions claimed the proposals were too little, too late. David Willetts, the shadow welfare secretary, dismissed them as "no extra tax incentives to save, no target for extra savings and no admission there is a crisis in pensions. It is like everything with this government, a lot of wrapping, and rehashed announcements, but no real content".

The Liberal Democrat welfare spokesman Steve Webb accused the government of ducking the introduction of compulsory saving by a decade or more.

Both Unison and the GMB resisted the idea of raising the retirement age from 60 to 65 for most public sector workers.

The former welfare minister, Frank Field, said the proposals were the last throw in making the voluntary system work.

-- Anonymous, December 18, 2002