State pensions link with earnings to be restored

STATE pensions will once more be linked with earnings from next year and the compulsion to buy an annuity scrapped under proposals included in the coalition agreement.

The link between the state pension and earnings is to be restored from April 2011, a year before originally scheduled after the Lib Dems won the argument over the timing of the change. Under the Lib Dem "triple guarantee", pensions will rise in line with earnings, inflation or by 2.5 per cent, depending on whichever is highest.

The parties also agreed to phase out the default retirement age, with a review into when the state pension age starts rising to 66. It will not be before 2016 for men and 2020 for women. The state pension age is already set to rise between 2024 and 2026 to 66, with the age at which women can claim the state pension currently set to rise until it is in line with the male retirement age by 2020, under reforms that came into force last month.

Rules that effectively make annuitisation mandatory at 75 are to be removed, according to the statement released on Wednesday. Buying an annuity is not a legal obligation at 75 but with the only other option – an alternatively secured pension – attracting 82 per cent tax on death benefits, it is all but compulsory. However the coalition government intends to introduce greater flexibility for investors at 75.

The document also hinted at belated good news for Equitable Life policyholders. While giving few details, the agreement claimed that the government would, through an independent payment scheme, make "fair and transparent payments" to Equitable Life policyholders for their relative loss "as a consequence of regulatory failure".