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Last Updated: Friday, 12 May 2006, 09:30 GMT 10:30 UK
Q&A: What the pensions deal means for you
A deal on pensions has been agreed between Tony Blair and Gordon Brown following months of wrangling - setting the scene for what could be a wholesale reshaping of the UK's troubled pensions provision.

Gordon Brown
Gordon Brown is now behind the Pensions Commission proposals

What is being proposed?

The details of the deal struck in government over pensions seem broadly similar to the recommendations made by the Pensions Commission late last year.

These include:

  • Increasing the state pension age for men and women to 68 by 2050
  • From 2012 onwards, making the state pension more generous and linking future increases to earnings rather than prices
  • Reducing the amount of means testing in the system
  • Automatically enrolling people into a new, low-cost national savings scheme, while giving them the chance to opt out if it is not suitable for them

The Pensions Commission, headed by Lord Turner, was set up to plot a path out of the pensions crisis.

GUIDE TO UK PENSIONS
Facts and figures outlining the depth of the UK pensions crisis

What does restoring the earning link mean?

Put simply, the state pension will go up in line with salaries, rather than prices - meaning bigger annual rises in the state pension than at present.

In a way, restoring the earnings link is a case of back to the future.

The link was abolished in 1980 by the then Conservative government, because it was seen as being too expensive.

I have read that there has been a political battle over these changes; is this true?

Whether the Commissions proposals would be adopted or kicked into the long grass has been in the balance for months.

Initially, the chancellor is said to have been annoyed at the proposals to end the means-tested pension credit - one of his most prized policies - and raise the state pension in line with average earnings.

He was accused in some quarters of holing the Commissions report under the waterline by suggesting it was too expensive - the Treasury equivalent of being blackballed.

However, a consensus has built-up around the Commission proposals, with Lord Turner insisting that they must be adopted as a package rather than just piecemeal.

And the Commission's findings have always been popular with both Number 10 and with Work and Pensions Secretary John Hutton.

So it seems that - after some horse-trading - a deal has now been struck and the green light given to the main Commission proposals.

Can I kiss goodbye to my ambition of retiring early?

It depends.

A hand chained to a desk
People may have to work for longer

The proposal is that you wait longer for your state pension, not that you should have to continue work.

You will still be free to retire early as long as your employer agrees - but under the proviso that you will have to support yourself until whenever the state pension kicks in.

In short, your ambitions will continue to depend on whether you can afford to give up work early.

Am I going to be forced to save for my retirement?

It seems that the government is keen to press ahead with Commission's idea of a National Pension Savings Scheme (NPSS).

The Commission proposed a system of "soft" compulsion.

If you are an employee you will be automatically enrolled into the low-cost NPSS.

Employers can opt their employees out of the NPSS if they offer their own scheme on an auto-enrolment basis and are making contributions at a higher level than would be the case under the NPSS.

Employees can choose to opt-out of the NPSS.

And there are lots of reasons why someone might choose to do so.

They may be happy with the amount of money they have put aside for their old age, or have other pressing financial commitments.

Ultimately, though, the idea behind automatic enrolment is that savings rates will increase because people will think it is too much bother to opt out.

What's the big deal over pensions anyway?

An ageing population means that, in future, there will be fewer workers to pay the pensions of a greater number of older people.

In addition, private saving has fallen and many employers - for a variety of reasons - have been cutting the amount of money they have been paying into their workers' pensions.

So what happens now?

The government has promised to publish a White Paper on pension reform in the spring - but as we enter mid-May it looks like early summer is now favourite.

And there is still plenty yet to be decided.

How will the NPSS work? What involvement will the financial services industry have in its running?

What will happen to the contributory principle of the state pension?

Lord Turner has called for the state pension to be paid according to residency rather than based on contributions.

The big idea is to benefit many women who have broken contribution records - because they have been caring for children or relatives - and who therefore retire on less than a full state pension.

Some commentators have suggested that the White Paper could have a "greenish" tinge to it - namely that several areas will be left for further discussion.

However, it is now certain that provisions for raising the state pension age and restoring the link to earnings will be included.


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