Q&A: Default retirement age

The government has said it will scrap a rule under which people can be forced to retire at the age of 65.

The move, which will come into effect from October 2011, will inevitably mean more people will work for longer, but it should also mean employees are not forced out of their jobs before they are ready to retire.

So, how will the changes affect you?

Who will benefit?

This is great news for the 68 per cent of over 55s who want to work past the current standard retirement age, says Darren Dicks, head of ‘at retirement’ for Aviva. And, he says, it is even better news for the 5 per cent who believe that they will be forced to leave their current roles when they reach the official retirement age.

Will I get a larger income from my state pension if I continue working?

To be entitled to the full state pension, you have to have worked for a set number of years. Scrapping the default retirement age is likely to mean that more people gain all of their entitement and so draw a slightly larger state pension when they do eventually retire.

Will my occupational pension or personal pension be worth more if I retire later?

Danny Cox of advice firm Hargreaves Lansdown makes the point that if you’re working for longer then you will have more time to build up a pension – from your own payments and from employer contributions if you are in a company scheme. This will produce a larger fund from which to draw an income, or buy an annuity. As a result, your eventual pension income will be higher.

What about people who want to retire at 65? Can they still do so?

Yes, people will still be able to choose to retire at 65 and take a state pension – although the age at which the state pension is payable is due to rise to age 67 by 2036 and to age 68 by 2046.

And anyone who has saved enough money to retire early will still be able to do so.

Will anyone lose out from the new rules?

Employers argue that this rule will block jobs for young people as older people remain in the workforce. By increasing the retirement age, the government is trying to solve one problem it has with pensions, but perhaps creating a greater problem elsewhere. Currently, there are a million young people out of work, and this measure could make it harder for them to get employment.

So, why has the government decided to do it?

Earlier this month, the European Commission urged European governments to raise their retirement ages because the current system was ‘simply not sustainable’. As a result, France will raise its retirement age from 60 to 62 by 2018, while Italy is raising its retirement age from 57 to 61 by 2013.

Adrian Lowcock, senior investment manager at Bestinvest says: “Whether we like it or not, and most of us won’t, the retirement age (65 for men) was set at time when the average life expectancy was 68. In this day and age, it is not unreasonable for people to expect to live into their late 80’s. This has added a huge burden on the state pension and the economy.

“As life expectancy increases it will become harder for people to save for their retirement – currently we work for 45 years and need to save enough money to be able to afford to be retired for 20 years. Not many people will be able to do this and most will not enjoy the same standard of living.”

Will anyone still be forced to retire at a certain age?

The government has said there could be exceptions for jobs such as air traffic controllers and police officers where performance can be linked to age. In these cases, the employer would need to “objectively justify” the decision to keep a retirement age. This might lead to court cases - but for entire professions or organisations, rather than individuals.

Will it mean annuity rates go up?

In theory, as you get older, the income you can get from an annuity should go up, because you have fewer years to live and draw an income. But Danny Cox of Hargreaves Lansdown says the trend for annuity rates at the moment is downwards and this is unlikely to be affected by the scrapping of the default retirement age.