The pension system has been given its biggest overhaul for decades after George Osborne announced radical plans for reform in yesterday's Emergency Budget..
The Government has taken drastic measures to reform the pensions sector, something many have been pleading for, for years.
From phasing out the retirement age, scrapping compulsory annuitisation and reviewing public sector pensions the coalition has taken steps to create a better deal for pensioners and review the sector's most outdated areas.
At the top of the plans the coalition announced that the earnings link will be restored, something the Tories abolished under Margaret Thatcher in the 1980’s.
The move will guarantee that those being paid the basic state pension will get a more generous annual increase on their income.
And from next April the pension will increase under the ‘triple’ lock system, whereby payments increase along with inflation, average earnings, 2.5 per cent, or whichever is higher.
While this will give pensioners a better deal they will have to wait longer to claim it because the state pension age is set to rise to 66 for both men and women. The change is scheduled to happen in 2024 but could happen as early as 2016, saving £13 billion a year.
The default retirement age, which is currently at 65, will also be phased out from April 2011 so those who want to work longer are able to.
However , independent policy advisor Dr Ros Altman thinks the Government should have taken more immediate action: “I would have hoped that the Default Retirement Age would have been abolished immediately. This ageism should have been outlawed long ago and I hope that the result of the Consultation will be to abolish the Default Retirement Age altogether, rather than 'phasing it out'. Older people both want to and need to work longer, they are fit and healthy and most are capable of working well past age 65.”
At the moment pensioners have to buy an annuity by the age of 75 but the Chancellor announced that this will be scrapped immediately. In the meantime pensioners have until they reach 77 but by next April the rule will be abandoned entirely, giving pension savers more investment options.
Mark Stopard, Head of Marketing at Sun Life Financial of Canada said: “In my opinion, the scrapping of compulsory annuitisation at age 75 is long overdue. My hope is that when the Government comes to develop its permanent rules next April, they look at better ways of balancing the Treasury's needs and allow people the flexibility they need rather than simply pushing the retirement age back to another arbitrary age."
Nick Scarrett, Fair investment's head of pensions and Investments has praised the move : "Instead of being forced to buy an annuity at 75 and having to take the rates available at that time, pensioners are being given the choice of when and even if they want to buy an annuity with their pension fund.
"I think it is a very positive move; not only will it mean that people have more choice, but hopefully it should go some way to encouraging people to save into a pension scheme.
Public sector pensions
No immediate action will be taken to amend the costly public sector pension system. Instead a review will deliver an interim report in September outlining changes that need making and a final report will be prepared in time for next year's Budget. One cost saving measure announced in this Budget, however, was that the increase in public sector pensions in payment will rise in line with consumer prices index, not retail prices index, alongside with the state pension.
But Dr Ros Altman has warned that a delay could lead to industrial action: “We need urgent action on this issue. Taxpayers and the workers themselves need to finally find out the truth about the costs and future commitments of these pension arrangements. This requires expert input with detailed pension knowledge. Public workers will clearly be told there is a choice between jobs and pensions. There will be major industrial unrest on this issue, that seems inevitable.
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