Middle class face plan for compulsory pensions

MIDDLE-INCOME earners would be forced to contribute to a pension fund to ensure they provide for their own retirement under plans being drawn up by the Government.

But the poor and the rich would be exempt from making compulsory contributions under proposals expected to be published in a long-awaited Green Paper before Christmas.

Alistair Darling, the Secretary of State for Social Security, believes the Government must insist on mandatory payments by people who are not in occupational or personal schemes to the new "stakeholder pensions".

Contributions would be deducted from pay packets on top of tax and national insurance. They would be higher than the existing payments to the state earnings-related pension scheme (Serps) by those without other pensions, which range from 2 per cent on incomes of pounds 3,300 a year to 10 per cent on earnings of pounds 25,200.

Mr Darling believes it would be wrong to order the low-paid to take out pensions, as the contributions they could afford would not build up a large enough pension.

The pounds 64.70-a-week basic state pension is declining in value because it is uprated in line with prices rather than earnings. Under the Darling plan the poor would receive a minimum pension guarantee. This would then ensure that they received income support top-ups without having to claim them.

The rich would be exempt from stakeholder pensions on the grounds that they could support themselves in old age and would probably have savings and investments if they did not have a pension.

Mr Darling has not yet taken the crucial decision to define the poor and rich people who would avoid compulsory pension payments.

Insiders say the level of income at which people would have to take out a pension would be between pounds 12,000 and pounds 20,000, probably towards the lower end of that range.

Defining "the rich" may prove controversial. One clue is that Labour considered plans while in opposition to tax the child benefit payments of those earning more than pounds 100,000 a year.

Although the scheme would be phased in over many years, it would eventually give about 3 million people without pensions an adequate income in retirement, relieving the burden on the pounds 100bn-a-year welfare budget. About 8 million of Britain's 32 million workers have no provision other than the basic state pension.

Mr Darling has yet to win approval for his proposals from a cabinet committee on welfare reform, chaired by Tony Blair. He may face some opposition from Gordon Brown, the Chancellor, who fears that compulsory pensions could be seen as a "back-door" tax rise.

Mr Darling will be keen to play down suggestions his plans would amount to a tax hike for Middle Britain.

Ministers will cite the plans as evidence the Government is pursuing radical welfare reform. But they will disappoint Frank Field, the former Social Security minister who resigned in July after failing to win Harriet Harman's job when she was sacked as Social Security Secretary.

Next week Mr Field will bring in a backbench bill calling for everyone to be covered by stakeholder pensions.

He wants the well-off to pay higher contributions to ensure the poor are covered, and believes his scheme would guarantee a pension of pounds 129.40 a week - twice the current basic state pension.

Mr Field is expected to argue that the Darling plan is flawed, because exempting the low-paid will remove the incentive for them to earn more, as they would then have to provide for their own retirement rather than rely on the state safety net.

He is worried that if poor people are left out of the scheme, the Government will be extending means-testing through the guaranteed minimum pension.