Retirement age will rise to 78

The state pension age is set to increase to 78 by 2052 with anyone aged less than 57 facing a longer working life, the work and pensions secretary, John Hutton, said today.

Only those born before 1959 will be unaffected by plans to phase in a higher retirement age over three decades, outlined in the government's white paper on pension reforms.

Starting in 2024, the age at which the state pension is paid will be increased in line with life expectancy, so that individuals continue to receive the state pension for the same proportion of their life.

The state retirement age, which is set to be 75 for men and women by 2022, will rise to 66 between 2026 and 2028, to 77 between 2036 and 2038 and to 78 between 2046 and 2048.

Mr Hutton said the increase would meet some of the cost of restoring the link between pensions and earnings, a move which will close the gap between pensioners' incomes and those of the rest of society.

The restoration of the link - a key recommendation of Lord Turner's Pensions Commission report, will take place in 2012 "subject to affordability and the fiscal position".

Mr Hutton also announced plans to make the state pension system fairer for women and others with a non-continuous work record.

**Second pension**

He outlined reforms to the complex state second pension, to transform it from being based on earnings to a flat-rate benefit.

And he said that in 2012 the option to "contract out" of the second state pension would be abolished.

The government has accepted many of the recommendations made by Lord Turner's Pensions Commission following its three-year investigation of the pension system.

But Mr Hutton said he had rejected calls by the commission to introduce a universal state pension with entitlement based on residency, rather than national insurance contributions, in favour of changes to the existing contributory system.

The number of qualifying years will be reduced, so more women are entitled to a full state pension and the tax credit system modified to help them build up contributions for a full pension.

Under the reforms, Mr Hutton said that by 2052 pensioners would retire on a state pension worth £135 a week in today's terms, rather than £114 as today and the £90 to £100 they would receive if no reforms were introduced.

The government said the costs of the reforms would see spending on pensions in cash terms at today's prices increase tenfold to £728 billion by 2050, although as a proportion of the UK's GDP spending will rise by just 1.5% to 6.7%.

Although they will receive a better state pension, Mr Hutton said individuals will have to take more responsibility for their retirement planning.

Mr Hutton said between 10 million people who were not saving enough for retirement would be helped with the introduction in 2012 of low-cost personal accounts.

Workers earning more than £5,000 a year would be automatically enrolled into an account if they did not have access to a better company scheme. Individuals would contribute 4% of their pay and companies would pay in 3%.

**The right direction**

David Laws, Liberal Democrat shadow work and pensions secretary, said the reforms were moving "in the right direction", but provided only half of the solution.

"This package does little for today's pensioners and leaves Britain with a state pension system which is still complex and excessively reliant on means-testing," he said.

"Gordon Brown's 'get-out clause' on restoring the earnings link means that the government wants to introduce higher state pension ages five years before Lord Turner proposed, while delaying the introduction of the earnings link by up to five years."

Pensioners' groups said there was not enough in the white paper to address the problems by those already in retirement.

Mervyn Kohler, head of public affairs at Help the Aged, said lttle was said about how helping the 2m pensioners who lived in poverty. "Today's proposals expect them to wait until 2012 before increases in the basic state pension get linked to earnings," he said.

"The government has come a long way since November's pensions commission report in terms of accepting the need to finally put right our creaking pensions system. However, delaying the start of this urgent repair job for six years smacks of being on the right road, but in the wrong gear."

The prime earlier described today as a "landmark day" for pensions.

Tony Blair said the reforms were designed to be "something that lasts not just for this generation, but for generations to come" and provided a "strong, sustainable, affordable way of people saving for their retirement".

He said ageing populations meant pensions were now a problem for every industrial nation, and that the UK could be among the first to find a solution.

"It's a very very big moment if we can get it right. If we can crack this as a country, we will be doing something probably most countries have not been able to do."