Britons to be forced to save for pension

Frank Field, the maverick MP who has been behind some of the Labour party's most far-sighted thinking on pensions, is convinced the Government is heading unavoidably for a system of compulsory pensions.

Andrew Smith, the Secretary of State at the Department of Work and Pensions (DWP), set his face against compulsion this week when he unveiled the oft-delayed pensions Green Paper, entitled Simplicity, Security and Choice: Working and Saving for Retirement. But many experts see that document as no more than a step along the route to compulsion and raising the age of pension entitlement to 70 or more.

Mr Field regards as a significant pointer the appointment of Adair Turner, former director general of the Confederation of British Industry, to head a standing pensions commission to report regularly "on how effectively the current voluntary approach is developing"; in other words, to keep the question of compulsion under constant review.

He said: "The Green Paper is the Government's last throw to get the voluntary system to work, and the commission will be the mechanism by which it ends the voluntary system. I think it is inevitable that we will have compulsion."

Mr Field believes Mr Turner will eventually come to the conclusion that people will have to be compelled to contribute to a pension. But, like the Bank of England's Monetary Policy Committee's control over interest rates, the fact that it will be an independent recommendation will shield minister from the flak bound to accompany such a measure.

But Mr Field, who heads the Pension Reform Group, predicts that the Government will go a step further in distancing itself from such an unpopular decision. Rather than have the DWP run a compulsory scheme – which would leave it open to charges of imposing another tax – Mr Field believes it will be administered by an independent body on the lines of the British Broadcasting Corporation. "I would hope they would ask the electorate to endorse compulsion at the next general election," he said. "But there needn't be a second Green Paper: it could come in a Finance Bill because the changes will be involve taxation. But you can hear the death rattles of the voluntary system. The question is how do we get a decent minimum pension for everyone. The Government is not interested in getting people to save, beyond the basic minimum. What they do beyond that will be up to them."

As a half-way house, pension rules are to be relaxed so people can continue working while they draw state and private pensions. Or they will be able to defer their state pension and take a larger regular payment later or a lump sum of about £20,000 for an individual. However, to earn that lump sum a pensioner would have to give up £100 a week, which over five years would amount to £26,000. But the direction of the Government's thinking was revealed by two related proposals. One is to raise from 50 to 55 the minimum age at which people can start drawing a private pension, and the other is to raise the retirement age for public sector employees from 60 to 65.

The Green Paper has startling statistics highlighting the forthcoming changes in Britain's age profile, and our lack of saving. There will be 16 million pensioners by 2050, an increase of five million, and the proportion of the population drawing pensions after 65 will rise from 24.4 per cent two years ago to 39.2 per cent in 2050. So, unless the pension age is raised or more pensioners earn their own livings, there is likely to be an intolerable burden on the main workforce.

It also shows that the dearer the house a person owns, the more likely they are to have a private pension. This explains one of the less-publicised proposals in the Green Paper, to ensure regulation of equity-release and home-reversion plans protects consumers and allows the market to work effectively. This reverses the Treasury's previous insistence that these plans did not need regulation, possibly because it is clear a growing number of people intend to use the equity value of their homes as an extra source of money.

Bob Bullivant, the corporate development director of Britannic Retirement Solutions, said: "We are delighted the Government is listening to the concerns we have raised about a two-tier equity release market, one regulated and one unregulated. History has shown us ineffective regulation does not serve the consumer well."

Dodging retirement

lan McNee likes teaching. He wanted to continue but had to retire because his local authority in south Wales does not employ over-65s. So he had go to through the rigmarole of being employed by an agency which then supplies his services to his school, Y Pant in Rhondda Cynon Taff.

"I'm fully qualified and fit," Mr McNee says. "But when they said I could not be directly employed, from a psychological point of view I felt someone had stripped me of my qualification."

If the Green Paper proposals become law, Mr McNee will be able to join the full-time staff of Y Pant.

Pensions green paper: the main proposals

* Pay people higher state pensions if they defer them. Someone entitled to £100 a week could get £150 a week or £20,000 if they delay taking it for five years. Couples would be entitled to a lump sum of £30,000;

* Abolish rules stopping those in occupational schemes from mixing work and retirement. Where scheme rules allow it, people will be able to draw benefits from their pension while continuing to work. But the minimum age at which benefits can be drawn from a pension scheme will be raised from 50 to 55 by 2010;

* Replace the existing eight pension tax regimes with a single, unified set of rules;

* Replace the limits on annual pension contributions by a single, lifetime limit of £1.4m or £200,000 a year and indexed thereafter. This will hit "fat cat" payoffs for company directors;

* The tax-free lump sum which people can take on retirement will be set at 25 per cent of the value of their individual's pension fund;

* More innovation in the annuity market, including limited-period annuities, and value-protected ones which would allow the provider to make a capital payment if the annuitant dies before age 75.

* Replace the heavily criticised minimum funding requirement for occupational pension schemes with a more flexible regime which places less of a burden on employers.