Jeff Salway: Weighing up what the parties' promises mean for retirement

WHEN the main political parties set out their manifestos this week their plans for the pensions system were prominent. And while the main parties broadly agree on some of the big pension challenges facing the next government, there is daylight between their policies on some issues that could have a profound impact on the retirement plans of millions.

Do they all intend to re-link the state pension to earnings? Which party wants to scrap compulsory retirement? Which parties want to end the effective compulsion to buy an annuity at 75? Are they all committed to auto-enrolment into workplace pension schemes? And which party thinks the higher rate tax relief on pensions should be scrapped entirely?

The intentions of the big three parties regarding pensions – the SNP is excluded as it is not a devolved issue – are now largely clear, at least until it comes to fulfilling any promises made. Here we compare and contrast what the parties say they will do with pensions should they win on 6 May:

STATE PENSIONS

The government has committed to relinking the basic state pension to earnings by 2012, under reform legislation already in place. The Conservatives also say they would do so, albeit without committing to a time frame, while the Liberal Democrats would immediately link pensions to either average earnings or inflation, whichever is highest

The state pension age, already set to rise to between 2024 and 2026 to 66, has also been the subject of modest manifesto pledges, with the Conservatives proposing to accelerate the increase to 66 from 2016 for men and from 2020 for women. The age at which women can claim the state pension will gradually rise until it is in line with the male retirement age by 2020, under reforms that came into force earlier this month.

The Lib Dems also set out proposals for a citizen's pension, under which all UK citizens would be eligible for the full state pension, regardless of their national insurance contribution record.

BUYING AN ANNUITY AT 75

This is perhaps the biggest single difference between Labour and the Conservatives. Currently, those who have not bought an annuity are effectively compelled to do so at 75. Annuity purchase at 75 is not mandatory, but the other option – buying an alternatively secured pension – attracts 82 per cent tax on death benefits, meaning that for most people annuity purchase is the only choice.

Both the Tories and Lib Dems propose to remove the compulsion to annuitise at 75, as long as those not buying an annuity have income above certain thresholds.

PENSIONS TAX RELIEF

Under rules coming into force next April there will be restrictions on the tax relief on pension contributions claimed by those earning more than 130,000 a year, with those on 180,000 and above getting just the basic rate relief of 20 per cent. While the Tories oppose the changes, they have not signalled an intention to reverse the restrictions. The Lib Dems are supportive of the restrictions and would to go further by abolishing higher-rate tax relief on pensions altogether, limiting relief to the 20 per cent basic rate.

FLEXIBLE RETIREMENT

The government has already scheduled a review of the default retirement age, currently 65, but has not indicated whether it would raise it or scrap it altogether, although the latter is thought to be most likely. The Lib Dems want to abolish compulsory retirement altogether, while the Tories said they supported scrapping it, subject to further investigation of the implications.

Laith Kalath, pensions analyst at Hargreaves Lansdown, said: "The default retirement age has been mentioned by all three parties, so its days seem numbered."

NEST

Under the government's National Employment Savings Trust (Nest), previously labelled personal accounts and to be phased in from 2012, workers aged over 22 and earning more than 5,035 a year will be automatically enrolled into their employer's existing pension or into the Nest scheme, with the right to opt out.

The legislation is already in place for the roll-out of the scheme, with employers given starting dates between 2012 and 2016, minimum contribution levels set and charges established.

The Conservatives have made noises about scrapping Nest, but in reality they are unlikely to change plans already set out in legislation, according to Khalaf.

"There is a lot of bluster and I think the differences between the parties on Nest are fairly trivial," he said. "Whichever party comes in will institute auto-enrolment and a lot of Nest is constituted already.

"The Tories have thrown their toys out of the pram on some issues but I am not sure they have any alternative."

However, both the Liberal Democrats and the Conservatives have said they would review the scheme, including the implementation timetable.