With the government split over retirement policy, more of us may have to work until we are 80. Teresa Hunter looks at the options

Published on Saturday 16 January 2010 14:09

A RIFT has opened up in the government over the national retirement age, after equalities secretary Harriet Harman publicly criticised forcing people out of work at 65, apparently signalling the government's intention to fast track plans to make us all work until 80.

The so-called "default retirement age" is already under review, due to report either later this year or early in 2011. But the Department for Business Innovation and Skills, headed by Lord Mandelson, in charge of the review, distanced itself from her remarks. It dispatched a letter to those involved in the review stressing there had been no change in the government's position.

However, pressure to extend our working lives is mounting. Lobby groups for the elderly, such as Age Concern, have campaigned strongly for the right to work beyond 65 on behalf of members who resent being forced out of work.

Other workers, though, are horrified at the prospect of the 65 limit disappearing, and finding themselves forced to work even longer.

Retirement ages cannot be altered in isolation. Changing the current regime could have huge ramifications for a wide range of other related issues, such as redundancy pay, state and private pensions, pension credit and other benefits available to the over 60s, generous personal tax allowances and annuities.

So will you have to work on? And what will be happen to your pension? We answer some common questions below.

At what age can I retire?

At present, this will depend on your contract of employment. In the past, many employees were able to retire at 60, even though the state pension age was 65 for men.

This was particularly true in the public sector, where many staff – such as police and firefighters – can still retire at 60 or even younger, despite recent reforms. This followed a huge growth in public-sector jobs in the 1950s and 1960s, where more attractive pension terms were offered to attract good quality staff.

But retirement ages in private industry have gradually risen, so that most companies now have a contractual retirement age of 65.

What is a default retirement age?

Under EU law it is illegal to discriminate against an individual on grounds of age, which includes dismissing them from work.

However, the EU decided that governments of member states could still set what has become known as a "default retirement age" in recognition of local labour market practices. The UK Government set our default retirement age at 65.

If a company dismisses you before this age, it must pay you compensation, such as redundancy pay. However, above this age your employer can ask you to leave, without paying any compensation.

Age Concern objects to this and complained to Europe that the UK Government was not adhering to EU anti-discrimination law.

Last March, the European Court rejected this appeal, ruling again that member states could provide for differences in treatment on grounds of age if they are "objectively and reasonably" justified by a "legitimate aim" and the means are "appropriate and necessary". It referred the matter back to the UK High Court to see if these tests were being met.

Last September, the High Court agreed the default retirement age of 65 could be justified, but added the matter was in urgent need of review.

Why would anyone want to go on working?

According to Age Concern, some people are fearful of retirement, because they do not know what they are going to do with the rest of their lives.

However, others, perhaps the majority, can't afford to retire. This is likely to be increasingly the case in the future, because they have failed to save enough during their working lives.

Don't those who want to work on have the right to?

Staff can ask to work beyond the company's retirement age, but there is no obligation on the firm to agree.

So retirement is to be abolished?

No, the idea is that because we are all living longer we need to go on working longer.

When the state pension age was set at 65, men in the UK typically lived less than five years after receiving their gold watch, whereas on average retirees today should make it to nearly 80 and their wives should live even longer.

Sixty is the new 40, or so they say, and 70 the new 50. On this basis, people should be able to go on working longer, and still have some time to enjoy a retirement at the end of their lives.

The problem with all this is that life expectancy is not evenly distributed, with Scots typically living five years less than the UK average.

Furthermore, many surveys have shown that while people are living longer, the quality of life at more advanced ages can be extremely poor.

So, yes, we may be well enough to continue working a few years more, but risk ill-health in later life robbing us of our retirement dreams.

How would it work?

This is the big unknown and what the review must sort out. Age Concern wants a default retirement age abolished altogether, so an employer can never ask a member of staff to leave on grounds of age, no matter how frail. The Trades Union Congress believes that getting rid of the default retirement age might simply free companies to set their own individual retirement limit. Therefore, instead of having a retirement age of 65, it could be set at 70 or 75 or even older.

Industry and business are strongly opposed to the total abolition of default retirement ages, as they believe they must have the right to say goodbye to staff who have had their day.

They are also concerned that keeping on older staff will prevent them recruiting and training young employees, and thereby refreshing their pool of talent.

It could even lead to inter-generational strife, if old workers cling on to jobs at times of high youth unemployment.

What happens to redundancy pay?

At present, if a company asks a staff member to leave before the age of 65, or its contractual retirement age, it must pay compensation, normally redundancy pay. If the default retirement age is abolished, companies would have to pay the same severance terms to all staff irrespective of age, even if they were in their eighties.

The only way this could be achieved would be to place a cap on redundancy. Instead, for example, of receiving one week's salary for every year of employment, this might be capped at a maximum of 20 years service or lower. This could result in younger staff being paid less so that compensation is available for older colleagues.

Will I still get my state pension at 65?

State pension ages are rising anyway. Women will see their state pension age rise from 60 to 65 in phases beginning this year and ending in 2020, which will require anyone under 60 to work longer. But under existing plans, both men and women under 49 will have to work even longer as their state pension age will rise in stages from 65 to 68, from 2024 to 2046.

The Conservatives have proposed speeding up this process, forcing men to wait until 66 from 2016, although women will get a bit longer to adjust.

However, many commentators, including former Pensions Commission tsar Lord Turner, believe the government will have to go further. On this basis, don't be surprised if you have to wait until 70 for your state pension, particularly if default retirement ages are abolished.

Will I be able to claim Pension Credit at 60?

Unlikely. If people are working longer, even part-time, then they will not qualify for pension credit. But the expectation must be that if all retirement ages are rising, then you will have to wait longer to claim means-tested pensioner benefits.

How will my company pension be affected?

That depends on what type of pension you have. It doesn't impact on those with a money purchase or defined benefit scheme, as such people are normally free to retire when they want to beyond the age of 55.

Indeed, for many in these schemes, it may even be good news, as they may welcome the opportunity to go on working, thereby boosting their savings and delaying having to buy an annuity, particularly if their schemes fall short of their expectations.

The position with final salary pensions is complex. Many employers would jump at the chance to delay paying a salary-linked pension until 70. Deficit sorted at a stroke. However, in theory, they cannot change the basis on which pension already accrued is calculated without employees' agreement. These are protected by law. But companies could change the pension age for future accrual. Specifically, the government could alter the pensionable age for public-sector workers.

A bigger worry though, would be that companies would attempt to look for loopholes in their trust deeds that would allow them to change the pension age even on pensions which have already been earned. Most trust deeds stipulate that pensions are paid at an employers' discretion.

Against this the law says that employees have reasonable expectations, implying accrued pensions are their private property, which cannot be taken away. But between the two there may be wiggle room.

More worryingly, some employees may find a gun put to their heads to agree ever later pension ages, even for accrued funds, in return for the opportunity to work longer.

Will over-65s still get a higher tax allowance?

Unlikely. Currently, the over 65s can earn 9,640 before paying tax, compared with 6,475 for all other workers, although this higher allowance is clawed back when income reaches around 22,000.

If more over-65s are working, then they will be subject to the same tax regime as the rest of the workforce.

Is there an alternative?

Given increasing life expectancy, the state of the nation's finances and pension scheme black holes, possibly not.