Cash boost for workers who put off retirement

Workers relying on state pensions will be offered financial incentives to work past the normal retirement age in today's long-awaited Government plans to reform the pension system.

Andrew Smith, the Secretary of State for Work and Pensions, plans to combat the "cliff-edge" of retirement at 60 for women and 65 for men. He has already signalled his intention to amend the rules preventing people with private pensions from drawing their entitlement if they carry on working. The Independent has learned he will also overhaul the regulations for the lowest-paid relying on state pensions.

At the moment people who stay on after the official retirement age are entitled to an extra 7.5 per cent on their state pensions for every extra year they work and opt not to take their pension. However, the incentive currently runs out after five years of extra work – at 65 for women and 70 for men.

Mr Smith will announce the increases on the state pension will rise to 10.4 per cent a year from 2006. And the five-year limit on extra payments will be scrapped, meaning a male pensioner who retires at 75 could see his state pension doubled. Whitehall sources said the changes would mean a pensioners entitled to £100 a week could be paid £152 if they carry on working for five years.

In other proposed changes, people with private pensions who stay on at work either full-time or part-time, will be allowed to continue building up their pension entitlements.

Amid concerns over the pensions "black hole" facing Britain following the stock market slump, Mr Smith will stress the need for all employees to have voluntary savings. He will announce an information campaign to alert people to the crisis, warning workers that they will either have to save more or retire later. One idea is requiring companies to issue annual statements setting out the cash shortfall they could face in retirement.

However, the Green Paper will also leave open the option of forcing people at a later stage to take out private pensions if they fail to heed the pleas to put more money aside. Mr Smith will announce that tax rules surrounding pension schemes will be streamlined.

Mr Smith is expected not to announce drastic action to prevent employers from closing final salary schemes, arguing that the British system compares favourably with other western countries. His decision will disappoint trade unions which have been pressing for sanctions against companies that shut such schemes. Kevin Curran, northern regional secretary of the GMB union, said: "The Government cannot stand by and tacitly support fact-cat company bosses who pull the plug on their final salary schemes." He forecast a "wave of industrial action" against firms which did so.

Last night Michael Howard, the shadow Chancellor, accused the Government of creating the current pensions crisis. He said that extra pension taxes had hidden the value of the stock market, with a knock-on effect toshare values on which pension funds rely.