The plans to end compulsory retirement at age 65 are contained with a consultation document called Phasing out the Default Retirement Age. This was published by the Department for Business, Innovation & Skills (BIS).

The proposals to phase out the default retirement age will result in it being abolished by October 2011. The phasing out will begin in April 2011.

Under current rules, employers can force their staff to retire at age 65, regardless of their circumstances. An employer needs to give a minimum of six months notice of retirement.

The consultation remains open until October and comes at the same time as the government makes plans to increase the State pension age, initially to age 66.

Assuming the proposals go ahead, it will be the first time that those over age 65 years have full employment rights.

Employers will need to give careful consideration to the proposals, looking at the impact on employment legislation and related issues such as employee benefits.

Abolishing the default retirement age makes it more challenging to plan for retirement, so individuals will need to determine their own planned retirement age and align their retirement income plans accordingly.

Whilst the legal right to work beyond age 65 is a positive move, it is important to recognise that it may not be physically possible for everyone to achieve this, particularly in some types of work.

Poor health, sometimes caused by work-related factors, is often a cause in forcing early retirement. Planning to provide an income in retirement from a reasonable age remains an essential part of financial planning.

Successive Governments have made a real mess of the UK pensions system which used to be quite simply the best in Western Europe.

The changes that the current Government are proposing seem to be “tinkering at the edges” and this is likely to have the unintended consequences of making things worse not better.

It is a time for radical change to simplify and modernise the system and give the UK consumer the certainty around retirement planning that they deserve.

My package of recommendations (it has to come as a package and not piecemeal) is as follows:

-Introduce a Basic State pension of £10,000 per year for those with a National Insurance contribution record of 30 years. Make this pension available at age 66. Index this pension in line with CPI.

-Abolish the State Second Pension for future accrual.

-Abolish contracting out for all schemes and have just one rate of NI contributions regardless of membership of pension scheme or not.

-Remove RPI linking of public sector schemes and replace with CPI indexation.

-Pay for the above by removing tax relief for all contributions to pension arrangements.

-Allow access to pension funds and benefits that have been accumulated but take a tax charge (30%) for those who do so. Have them sign a “social contract” so that they cannot later come back and claim State benefits if they use their pension fund unwisely and run out of money.

-Abolish all the rules and regulations surrounding pensions such as the Standard Lifetime Allowance and annual contribution limits.

Those who want to retire before age 66 or who need more than £10,000 that they will get from the State will have to save to achieve that.

There will be those who argue against the abolition of tax relief claiming that tax relief encourages savings but I would argue that this is inefficient and simply is not working.

The cost of the above would need to be calculated (I don’t work for the Treasury) but it seems that taken as a package this is likely to be cost neutral or possibly even raises current revenue to the Government.

But don’t hold your breath! Politicians are fearful creatures and don’t like wholesale or radical change even when it is in the interests of the majority of consumers.

What changes do you think the Government should introduce?

The consultation paper describes how pension income will continue to be taxed at income tax rates. No big surprises there.

It goes on to explain that any unused funds on death will be taxed at a rate to recover past relief, unless they are used to provide a dependant’s pension. They think that an appropriate ‘recovery charge’ would be 55%.

Under current rules, if you die before age 75 after taking tax-free cash from your pension fund but whilst still in Unsecured Pension (previously known as Income Drawdown), then the tax charge if your beneficiaries take a cash death benefit is 35% of the unused fund.

The tax charges get much more expensive after age 75, if you are in Alternatively Secured Pension (ASP), although this retirement income option will no longer be available to new retirees.

The consultation paper does point out, helpfully, that death benefits for those that die before age 75 without having taken any benefits from their pension will remain tax-free. This is the same as the current arrangement.

So, should you still take your tax-free cash?

The proposals suggest that by taking tax-free cash, you expose your beneficiaries to the risk of paying tax at 55% rather than 35% if you die before your 75th birthday and if they opt to take the death benefit as a cash lump sum. Other death benefit options exist.

Whilst death benefits are clearly an important factor when deciding on the most suitable retirement income option, they must be considered in conjunction with a whole range of other factors, including the desired level of income flexibility, annuity rates and investment risk.

If you do not need the tax-free cash from your pension fund in your bank account or direct control, then leaving it in the pension fund retains the tax-free death benefits, unless you die after your 75th birthday when they will continue to be taxed.

Of course there is nothing from stopping the Treasury from removing the tax-free status of cash from a pension fund on retirement in the future, further complicating the decisions people reaching retirement need to make about their pension benefits.

As has always been the case, it is essential to seek professional independent financial advice before making lasting decisions about retirement income options. Choosing the right retirement option is and always will be about so much more than finding the best annuity rate.

With the cost of living increasing and the economic downturn hitting savings and investments, pre-retirees are having to make the choice between meeting their current lifestyle requirements and their planned future lifestyle.

This worrying trend is compounded by the fact that those in retirement are often most exposed to inflation because their income is fixed and the goods and services they purchase are affected by rising inflation the most.

In addition, we are all living longer and will be required to rely more on our own financial resources than receive support from the State in old age.

The cost of care increases well above the official rates of inflation (be it RPI or CPI) so the most expensive period of retirement may be in later life.

If you are at or near retirement you should consider how much you will need in retirement to meet your costs and consider forgoing avoidable expenditures now if it will have a detrimental affect on your lifestyle in retirement. 

Now is the time to use any disposable income to  maximise savings and investments, through pensions and ISAs as a priority, to build up a retirement war chest.

It is also imperative to shop around and seek advice when considering your retirement option to ensure you get the most appropriate product and best deal for you. 

The golden rule is never to accept the annuity offered by your pension provider without first ensuring it is competitive and, if it isn’t, to take the ‘Open Market Option’ and purchase an annuity for the most competitive provider for your needs. Remember too that you can get enhanced or impaired life rates if you suffer from certain medical conditions or if your lifestyle habits decrease your life expectancy.

Perhaps not so radical because I understand that in the USA consumers are allowed to access their 401k plans (the equivalent in the UK to occupational defined contribution plans).

We can see both advantages and disadvantages to early access to pension monies.

The biggest single disadvantage would be where consumers effectively mortgage their futures to pay for immediate needs.

Let’s hope that if early access is introduced the rules are robust enough to prevent “frivolous” use of such monies.

On a connected but separate note I sense already a rush by the current Government to make significant changes to pension provision in the UK.

We must all hope that they apply more joined up thinking than the last administration who pretty much destroyed the best private pension provision of any Western European country.

Drinks company Diageo has come up with a novel way to tackle their own estimated £875 million pension shortfall.

Rather than pay more company profits into the pension scheme, they have established a pension funding partnership (PFP) that will produce whisky with a maturity date over 15 years.

The PFP will then sell it back to the company for an amount predicted to be no greater than the pension deficit at that time, up to a maximum of £430m.

This structure has the added benefit of generating an income for the pension scheme of £25m a year.

Of course pensioners in the Diageo scheme will get cash rather than booze when they retire.

The UK has a total pension deficit of £21.8bn from 6,653 schemes, according to the latest figures published by the Pension Protection Fund (PPF). This is compared to a surplus of £11.7bn only a month ago, which demonstrates how quickly a surplus can turn into a deficit.

It still remains much better than the record deficit of £149bn a year ago.

Other companies with big pension scheme deficits might consider following the lead of Diageo with innovative solutions to dealing with the problem.

These pension schemes are currently increased each year in line with the Retail Prices Index (RPI), which is typically higher than CPI. Over the past twelve months, CPI has been 3.4% with RPI at 5.1%.

Pensions Minister Steve Webb made the announcement in a statement, saying:

“The Government believes the CPI provides a more appropriate measure of pension recipients’ inflation experiences and is also consistent with the measure of inflation used by the Bank of England.

“We believe, therefore, it is right to use the same index in determining increases for all occupational pensions and payments made by the Pension Protection Fund and Financial Assistance Scheme.”

He might have a point.

The RPI measure of price inflation includes the cost of mortgage interest payments; something that those in retirement do not typically need to meet. However, price inflation in retirement is usually higher than it is for people still working, as the goods and services consumed by older people tend to increase in value at a faster rate.

The Trades Union Congress (TUC) is unhappy with the plans, pointing out that if this link had been in place for the past twenty years, pension payments today would be 14% lower than if they had been linked to RPI.

One impact of this move is that it will reduce the cost of funding pension provision. KMPG has estimated that the move will reduce UK private sector pension liabilities by 10% or about £100bn.

This could result in a temporary reprieve for those private sector defined benefit schemes that remain open to new members. These expensive schemes are closing on a regular basis, due to the higher cost of providing benefits because of longer life expectancy, lower investment returns and more stringent requirements.

Changes to your own pension benefits will depend on your individual scheme, so it is important to engage with the scheme trustees throughout the process and understand what impact it will have on your income in retirement.

Do speak to us if you have any questions about the impact this change could have on your retirement planning and what steps you will need to take to plan for any shortfall as a result.

Talking about the end to compulsory retirement at age 65, Nick said:

“But just because most people will have to work for longer, it doesn’t mean they should delay making decisions about pensions and retirement savings,”

For people in their 20s, Nick had this to say:

“If it turns out that you should be putting away £200 a month but actually you can only afford £70, the worst thing you can do is to think that it is pointless saving anything at all,” says Bamford.

“Yes, investments can go down as well as up but they’re still likely to give you better returns over a long period.”

For people in their 30s, Nick had the following words of wisdom:

“We all need to return to the old values of not spending more than we earn,” says Bamford.

“People are living for longer and sometimes you need to rein back spending and save for the future.”

You can read the article in full here.

Nick spoke about the main highlights from the Budget and our analysis. In particular, Nick described changes to income tax and capital gains tax, and what the Budget means for your retirement planning.

The live webcast has been recorded and you can watch it below.

This is the first in a new series of monthly webcasts from Informed Choice. We look forward to bringing you details of our July webcast soon.

A survey from Standard Life found that we place expensive cars and jewellery ahead of our retirement savings.

They found that £15,000 is the ‘tipping point’ where people typically care about how their money is invested.

According to Martin Bamford, a financial adviser at Informed Choice, this apathetic attitude is costing Brits dearly.

“Too many pension scheme members select the default investment option rather than something tailored to your own financial objectives,” he says.

You can read the article in full here.