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Tuesday, 17 December, 2002, 16:54 GMT
Q&A: Pensions shake-up explained

In response to the growing UK pension crisis the government has published a green paper. BBC News Online sets out what it means to you and what happens next.

Why has the government had to take action?

The government is worried because the number of pensioners is growing fast, compared to the number of people still in the workforce.

In short, the demographic time bomb facing the UK has finally hit home.

Workers under 50 years of age can expect to live well into their eighties. As a result, in future, people will spend longer out of work than in it.

It is estimated that people in the UK are currently saving 27bn less than is necessary to make up the retirement shortfall.

Who will have to make up the shortfall?

The onus of retirement provision has shifted from the state to individuals and companies.

However both personal and company pension schemes have been hit by the worst stock market conditions for a generation.

Many big name companies have closed their lucrative final salary schemes - reducing the amount they pay into their employees pensions.

The green paper is intended to get people saving more for their own retirement.

Will I able be able to work longer?

Firstly the government has decided not to increase the state retirement age, and force people to work longer - but there will be more incentives to do so.

People will still be able to retire at 65 on a state pension, but they will be offered cash not to do so.

Individuals that defer collecting the state pension for five years or more could see its value increased by 50%, alternatively, a lump sum as high as 20,000 will be available.

In addition, the rules which bar people collecting a state pension while being at work are to be relaxed.

And the retirement age of new public sector workers will be brought into line with the private sector.

At present, public sector employees can retire on a pension at 60.

What else will happen to make personal pensions easier?

At present there are eight different tax thresholds for pensions.

In future will be whittled down to one lifetime limit on the size of an individual pension pot.

Regardless of whether someone pays into a personal or company pension the total sum allowed to be saved to provide a retirement income will be 1.4m.

This should cut the costs to employees of administering pension schemes by between 150m-200m a year.

What is a green paper?

Put simply a green paper is the first stage of the legislative process.

The ideas put forward in a green paper are meant to invite comments from inside and outside parliament.

Once this consultative process has been gone through the government will produce a white paper.

The white paper will outline the government's policy and the process will then move forward to the bill stage.

In some cases ideas are dropped between green and white paper stage.

So is this the end of the pension crisis?

This green paper may only act as a staging post for a future pension system.

For example, the government has steered clear of forcing individuals to contribute to a personal or company pension.

But this doesn't mean that it will not happen.

Andrew Smith, minister of Work and Pension has said that 'now' is not the time for a compulsory pension.

However, Adair Turner, former head of the Confederation of British Industry (CBI), has been appointed to monitor how well any reforms work, with the clear implication that if people do not get the message and save more, they may well be compelled to do so.

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