People giving up retirement plans and working 5 years longer could receive as much as £30,000 from the government under rules in the Pensions Bill.

In effect, the government will hold on to people’s pension payments and pay them back as a lump sum with interest. The actual interest figure will not be released until almost the time when the first pensioners could join the scheme – April 2005, but it is thought to be around 6%.

As an alternative to the lump sum, pensioners will be able to take an increased pension around 10% higher for every year extra they work.

But is it what pensioners need?

The scheme does nothing for those unable to continue working and even less for those whose nest-eggs have been destroyed by poorly performing pensions and endowments. Taxation on the lump sum will begin with savings of around £7,000.

It will be interesting for some people who want to carry on working. Mervyn Kohler of Help the Aged told BBC’s Radio 4 Money Box programme last Saturday, that the scheme was one useful concession in a Pensions Bill that had been disappointing. "It helps a bit in a bill that is short of incentives,” he said. “Here at least is a genuine incentive for people who want to think about working a bit longer."

The Bill allows for the lump sum to be ignored in any savings used to determine whether the pensioner is eligible for Pension Credit.

"The people who stand most to benefit are those with pretty modest pensions who hoped to top-up with Pension Credit, who work a bit longer and get the lump sum,” said Mervyn Kohler.

Datamonitor, the premium business information company, comments:

Even though measures such as lump sum payments are important to enhance some pensioners' financial positions in the near future, the real problem lies within the structure of pension provision.

The need for putting off retirement has arisen from poorly performing pension funds providing smaller pension levels than expected, as well as from an increase in expenses such as council tax.

The government is aiming to tackle the problem of insufficient pensions by providing people close to the official retirement age of 65 with an incentive to work until they reach their 70th birthday.

Short term cure

A financial reward is seen to be the most efficient incentive to turn the trend of early retirement as well as to assist those with small projected pensions. However, the incentive of a financial windfall for those not retiring at 65 is only a short-term cure, continues Datamonitor. It does little to help the long-term situation where elderly people cannot afford to give up work.

The decision to introduce pension credits at the end of 2003 was one of the steps taken by the government to improve the conditions of those with inadequate pensions. The problem with the pension credits scheme is its complexity, which has put off many entitled to receive the benefit. Some also see this type of additional payment as governmental assistance for poor citizens, leading to many qualified pensioners not claiming it due to reasons of pride.

Decrease in taxation would be a better option

Instead, a direct increase in the state pension provision, seen by many as something they have earned, would have more widespread effect on pensioners' financial conditions. For those willing to work past the official retirement age a decrease in taxation would be a welcome boost and could generally help to increase the average age of retirement more efficiently than a specified lump sum after a certain number of years.

In any case, the government needs to pay attention not only to the mass of population retiring in the next 5-10 years, but to the financial conditions of pensioners in 20 years time, when the UK is predicted to have one fifth of its population retired.