People will be encouraged to work beyond the usual retirement age of 65 and could be forced to save for their old age, under government plans for a shake-up of pensions unveiled on Tuesday.

CASE STUDIES

I can't believe that I worked all those years and all I will get is seven pence a week Margaret Watts

7p-a-week pension State pension struggle Company scheme disaster

Workers deferring their state pension for up to five years will instead be offered a lump sum of up to �20,000 at the age of 70.

According to government estimates, up to 3 million workers are "seriously under-saving" for their retirement, and an independent commission will now investigate whether workers should be forced to make additional private pension arrangements.

Announcing the plans in parliament, Pensions Secretary Andrew Smith said the government preferred a "voluntarist approach", and it was up to employers and employees to "rise to the challenge".

Pensions experts say the UK savings shortfall could be as big as �27bn.

The proposals are contained in the Green Paper on pension reform, which outlines ways to tackle the deepening crisis of both the public and private pensions system.

The plans include:

• raising the retirement age of new public service workers to 65
• persuading the pensions industry to introduce simpler, standardised pension schemes
• setting up a new "pro-active" regulator for the pensions industry
• stopping workers drawing company pensions before they are 55 years old
• simplifying the tax treatment of pensions.

At-a-glance: Green Paper on pension reform

Public sector faces pensions upset

Mr Smith plans to raise the pension age of public service workers from 60 to 65 years, hitting teachers, nurses and other civil servants who join the civil service from 2006.

The change applies "initially" only to new state employees, but the government could extend the scheme to the whole public sector in due course.

The proposal is likely to upset public sector unions already on the verge of strikes over pay and conditions.

Simplified tax system

Another government proposal could allow employers to make membership of a pensions scheme a condition of employment.

The Green Paper also proposes a radical simplification of the tax regime on pension funds from eight systems to one.

Pensioners will be allowed to put aside up to �1.4m for their retirement fund, which qualifies for tax relief.

And the government wants to persuade the financial services industry to offer simpler pension schemes, which meet certain basic standards of clarity and low investment risk - similar to the CAT standards for certain savings products.

Left with no savings

The pensions industry, which in recent years has been engulfed by a string of scandals, is likely to get a new regulator.

A regulator will have the brief of "pro-active" monitoring of the industry, particularly where there is a high risk of fraud, bad governance or maladministration.

The Green Paper also proposes measures to address the issue of "wind-ups", when companies close down their final salary pension schemes - products commonly considered the gold standard of UK pensions.

Many workers caught up in those closures have been left with virtually no savings for their retirement.

At the same time, workers may no longer be able to retire at 50 and draw their company pension. Instead, the government wants them to work until they are at least 55. The new rule would kick in from 2010 onwards.

Before presenting the Green Paper, Mr Smith had described the fixed retirement age as "increasingly anachronistic".

"We need to enable people to work longer to erode that cliff edge where at present you are a valued member of the workforce on Friday and shifted off into retirement on a Monday," he told BBC Radio 4's Today programme.

Savings gap

It is estimated that people in the UK are saving �27bn less than they need to fund their retirement.

Plummeting stock markets have made a bad situation worse, with many pension funds in trouble or generating much lower returns than promised.

There are further problems due to closure of many company-run final salary schemes, and the decline in benefits paid by the state pension system.

Two major reports earlier in the year highlighted the weaknesses in the current system of pensions and savings.

Red tape, tax burden

The Pickering report, written by Alan Pickering, a former chief of the National Association of Pension Funds, concluded that the onus for saving had swung too far from individuals towards employers.

As a result, firms are becoming increasingly unwilling to provide schemes and play their part in filling the UK's savings gap.

They are choosing to close their final salary pensions schemes instead, he said.

Ron Sandler, the former Lloyd's of London chief, set out reforms of the financial services industry with the aim of encouraging people to save more for retirement.

Last July, the Sandler report called for a reform of with-profits savings schemes and the way in which financial advisers are paid.