Pensions and Savings Bill effects: a breakdown

1. THE “default retirement age” is to be scrapped. That means that employers will not be able to force retirement on workers who are older than 65. If workers wish to stay on, they will benefit from all of the employment protection available to younger workers, forcing employers to pay redundancy packages or else to sack workers for incompetency.

2. FROM 2012, employers will be required to automatically enrol employees in a pension scheme, although there will be a three month waiting period before employees need to be enrolled.

The Department of Work and Pensions estimates that enrollment in a pension could be worth £30,000 to an average earning worker, based on employee contributions of 3 per cent of salary per year.

The aim is to encourage people to save, in light of evidence suggesting that most British people are saving far too little for their retirements.

3. THE bill also confirms the rise in the state pension age to 66 by 2020, bringing forward by six years the plans originally introduced by the Labour government. Under those plans, the pension age was due to reach 68 by 2046.

It may now reach that level much earlier, with some speculating about a potential pension age of 70. The plans also equalise the state pension age between men and women.

4. HOWEVER, the state pension will be linked to increases in earnings, rather than to inflation from April 2011. If past trends continue and average earnings keep rising, that ought to mean real increases in the state pension. With earnings growth currently suppressed however, it seems unlikely that many pensioners will notice the difference just yet, as their pensions will increase by just 2.5 per cent.

5. SOME pensions, in both the private sector and the public sector, will see a change in the rate of increases from the RPI measure of inflation to the CPI. On historical measures, that would have led to a large cut in payments. However, the RPI is not necessarily always a higher measure of inflation than the CPI. It has been over recent years because, unlike the RPI, it includes a measure of housing costs, which have been increasing. If housing gets cheaper that may actually reverse.