A flexible retirement scheme could work

There is a new willingness by employers to take on older workers, as the Financial Times has been reporting this week. So why wait until 2026 to raise the state pension age to 66, as the government proposes?

Surveys show that public opinion the world over is against the whole idea of a fixed retirement age.

Later retirement is already encouraged to a modest degree under present UK arrangements for deferring pensions. Lord Turner’s Pensions Commission outlined ways in which this could be further promoted, but stopped short of what could have been a much more dramatic and popular proposal – to abolish the fixed state pension age ­altogether.

Under rules introduced in April 2005, the state pension rises by 10.4 per cent for each year that it is deferred, compared with 7.5 per cent before then. A lump sum equal to a year’s pension plus interest can be taken instead if the pension is deferred for a year. For example, a 65-year-old entitled to a pension of £84.25 a week now would get an extra £17.50 for deferring it until 67, or an additional lump sum of £9,300.

Yet only 20,000 pensioners a year have deferred their pensions, most of them for two to two-and-a-half years.

The main defect of the British deferral system is the use of simple rather than compound interest by which in each year after age 65 it adds 10.4 per cent to the normal pension. This means that by age 70 the annual gain from deferral falls to only 7.3 per cent. Nevertheless, the British system is more generous than that in most other countries and should be publicised “much more aggressively” by government, as the Turner commission argued.

The scheme needs to be repackaged as one of flexible retirement ages from 60 upwards, with no reference to particular fixed ages in the middle of the range. There is no longer an upper limit of 70 to the scheme, but pensioners have to decide whether deferral is compensated for by the number of years they expect to live and receive the higher pension. The pension guarantee credit is already available between 60 and 64, so this feature could be incorporated into the scheme.

There should also be a new facility, as argued by Lord Turner, for transitional years of partial pension combined with part-time work, on a basis of 25-75, 50-50 or 75-25. This would create a gradual downward slope from full-time work to total retirement, instead of the present drop off the edge of a cliff from which many pensioners suffer.

The Turner commission has pointed out that life expectancy varies widely with social class. A professional man of 65 in social class I can expect to live to 83, while an unskilled man in social class V can expect to live only to 78 – a difference of five years. If periods of retirement were to be equalised at 15.5 years, the professional man would retire at 67.5 and the unskilled man at 62.5.

Other countries are moving towards flexible retirement ages. In Canada the state pension can be taken at any age between 60 and 70. The pension pay­able at 65 is reduced by 6 per cent for each year of earlier retirement, and increased by 6 per cent for each year of later retirement.

The success of a flexible retirement scheme will depend on employers being equally flexible and employing more older workers. The Age Discrimination Act coming into force in October will improve matters, but it will still allow employers to dismiss workers of 65 or over without facing unfair dismissal actions.

If the state pension age were to be abolished, it could no longer act as the private sector’s default retirement age after which employees can be dismissed with impunity.

The counterpart to flexible state pension ages should be encouraged and developed in private sector pension schemes. The government is to review the default retirement age in 2011, with a view to abolishing it.

Retirement before 55 will no longer be permitted – and many schemes already pay higher pensions the later their members retire. The move from defined benefit to defined contribution schemes will also give members an advantage in working longer so as to increase contributions, and thus ­pensions.

Earlier retirement by higher income groups with higher pensions and longer life expectancy will not be easily accepted by those dependent on state pensions if they have to retire later and get less.

The writer is former chief economic adviser to Lloyds Bank. He is conducting a research project on the ageing society

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