Compulsory retirement to be phased out

Plan to end the so called default retirement age is outlined in a consultation document to be published today

People will be encouraged to work longer under government plans to phase out the so-called default retirement age of 65 by October 2011.

Currently employers can make staff retire at 65 regardless of their circumstances, but ministers signalled this was set to change as people were living longer, healthier lives.

The proposal to phase out the default retirement age (DRA) is outlined in a consultation document, published today, which will run until October.

However, the government said bosses will still be able to operate a compulsory retirement age if they can “objectively justify it”.

The move to phase out the DRA is one of a number of measures the government is taking to help and encourage people to work for longer against the backdrop of demographic change.

Other steps include reviewing when the state pension age should increase to 66 and re-establishing the link between earnings and the basic state pension.

The business department said the consultation also proposes to help employers by removing the administrative burden of statutory retirement procedures.

A department spokesperson said: “With the DRA removed there is no reason to keep employees’ right to request working beyond retirement or for employers to give them a minimum of six months notice of retirement.

“Although the government is proposing to remove the DRA, it will still be possible for individual employers to operate a compulsory retirement age, provided that they can objectively justify it. Examples could include air traffic controllers and police officers.”

The plans provoked a mixed reaction. Campaigners welcomed the decision, but employers warned the removal of a default retirement age could make workforce planning more difficult.

Chris Ball, chief executive of The Age and Employment Network, called it a “win/win outcome” for employers, but warned that today’s move is only a first step.

“Many employers will need to adopt a totally new mindset,” Ball said. “They will need to actively plan and assist workers to be able to go on contributing to the success of their organisations.

“This may mean adapting work practices and work places. It will certainly mean providing opportunities to train or retrain and to work more flexibly, and, crucially, actually recruiting people in their 50s and 60s where they may not have done so in the past.”

Rachel Krys, campaign director of anti-ageism group the Employers Forum on Age, said the default retirement age, which was created in 2006, was a “dated and unfair system”.

“Its removal is simply common sense,” she said. “With rising life expectancies, and people staying fitter for longer, it is archaic to assume that someone’s age is an indicator of the contribution they can make to the workplace.

“Employers have nothing to fear from this change. This is an outdated policy and the removal of forced retirement is an opportunity to put policies and processes in place which make the most of an age-diverse workforce.”

The Chartered Institute of Personnel and Development (CIPD), which has campaigned for many years to remove the DRA, said the “breakthrough” was “greatly encouraging”.

Dianah Worman, the CIPD’s diversity adviser, said: “Our research has shown that many employees wish to work past retirement for differing reasons and many employers are already benefiting from allowing such flexibility.”

The Confederation of British Industry (CBI) said the proposals will give employers little time to prepare and leave them with unresolved problems. John Cridland, CBI deputy director-general, said: “Scrapping the DRA will leave a vacuum and raise a large number of complex legal and employment questions, which the government has not yet addressed. Employers and staff will not know where they stand. There will need to be more than a code of practice to address these practical issues; we will need changes in the law to deal more effectively with difficult employment situations.”

David Yeandle, the Engineering Employers Federation‘s head of employment policy, said: “Many manufacturers will be seriously concerned about this change in policy, which will make workforce planning more difficult.

“The proposed timetable also gives employers virtually little or no time to alter their policies and practices before such an important change in employment legislation is introduced.

“There is also a real danger that it could open a Pandora’s box with the onus being placed on employers to prove whether older employees are capable of continuing in their current role. Inevitably, this could lead to employment tribunal cases from some older employees who have been dismissed rather than allowed to retire.”

Today, pensions minister Steve Webb admitted that people face a “hell of a shock” when they reach retirement because of their failure to save.

In an interview with the Independent, he admitted that the basic state pension of £97 a week is “not enough to live on”, and confirmed that the government would raise the state retirement age to 66 earlier than planned. He said that around 7 million people are currently not saving enough to meet their retirement aspirations.

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Compulsory pension annuities could be scrapped

Announcement this morning expected to say that pension investors will no longer be forced to buy an annuity

The government will announce a long awaited consultation on the scrapping of compulsory annuitisation later this morning.

The Financial Secretary to the Treasury Mark Hoban will announce proposals outlining how the government intends to implement the “simplification” of rules from 2011 which force people to buy an annuity with their pension fund.

Both the Conservative and the Liberal Democrat manifestos included plans for the ending of these rules, which are particularly unpopular with wealthier investors who feel they and their families lose out through having to buy an annuity which will die with its owner.

Chancellor George Osborne announced in the budget that the age at which an investor has to use his pension fund to buy an annuity would be pushed back from 75 to 77.

But Tom McPhail, head of research with independent financial adviser Hargreaves Lansdown said he expected the Treasury to announce a further relaxation of this requirement.

He said: “This change is likely to require investors to secure a minimum level of guaranteed income, ensuring that they won’t be a welfare liability to other taxpayers. Investors will then have the freedom to draw on the balance of their pension investments either as a lump sum or in the form of a drawdown income. On death they will be able to pass on their remaining pension assets to family members.

“This consultation is a revolutionary change, putting investors in charge of their own retirement plans. The more you save for retirement, the more control and flexibility you’ll have and ultimately, the more you’ll be able to pass on to your family on death. Combined with the tax breaks on pensions, these simple messages will be very popular with investors.”

However, he pointed out that most people would still end up being required to buy a pension annuity, because the vast majority are bought with relatively small pension funds of £50,000 or less.

McPhail said: “For most investors with this size of pension fund, it is not realistic to take on investment risk or life expectancy risk after retirement. Over time we expect more and more investors to build up money purchase funds large enough to be relevant.”

Yesterday Hoban announced further details of a new scheme that could help people to save more towards their retirement: the planned “financial healthcheck”, which will be developed and piloted by the Consumer Financial Education Body, should be ready for launch next spring.

He said: “The healthcheck will help families and individuals get into the habit of taking a thorough look at their finances. It will show them where they are most at risk and how they can regain control and plan for the future. The healthcheck will give people a ‘prescription’ that will offer clear advice on what they can do to improve their financial situation now and for the years ahead.”

He added that general household savings were also far too low: “In fact, household saving was negative in 2008 for the first time since the 1950s. Far too few were saving for a rainy day. Before the crisis more than a quarter of households had no savings at all, almost half had less than £1500 in savings and of those who were in debt, many were in arrears, at an average level of £1,100.

“As a government, we are committed to helping families to take greater responsibility for their finances and to cushion themselves from future shocks.”

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