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The government announced its long-awaited strategy to tackle the growing pensions crisis yesterday when it offered simpler pensions and abolished the fixed retirement age of 65.

Andrew Smith, the work and pensions secretary, also opened the door to compulsory contributions to close the savings gap.

The shake-up was more radical than many expected, with sweeping changes to taxation. The eight different sets of tax rules currently applying to pensions will be ditched and replaced with just one.

In a candid admission of how this and past governments had allowed the rules and regulations to grow over the years into a mountain of red tape, Mr Smith said the pensions system was a "labyrinth of complexity" and that for most people, pension planning was "an incomprehensible maze".

The main aim of the proposals are to encourage more people to save more money into pensions. To do this, the government is to make it easier for people to carry on working beyond 65.

A combination of increased life expectancy, people not saving enough for retirement, three years of falling stock markets and low interest rates are having a devastating impact on millions of people's pension pots. These factors are also helping to fuel the problem of record numbers of companies closing their generous final salary pension schemes to new staff.

Millions of people are likely to heave a sigh of relief at the confirmation that the right to take a tax-free lump sum from their pension fund at retirement has been retained. Also safe is higher-rate tax relief on pension contributions, which enables higher-rate taxpayers to claim 40p back in tax relief for every £1 they put into their pension.

Many are also likely to welcome the news that compelling people to pay into a pension has been ruled out fornow, and there will also be wide support among the public for the decision to keep the state pension age where it is and not raise it to 67 or 70.

The government is abandoning unpopular rules which prevent those who want to stay working part-time for the same employer from drawing part of their company pension at the same time.

And, amid worries about companies going bust and workers seeing their pension entitlement snatched away, there were proposals to beef up employees' pension rights when firms go to the wall.

But some of the proposals were widely criticised. Many industry commentators said there were not enough incentives to encourage people to lock up cash in a pension.

Furthermore, the government intends to raise the minimum age at which you can start drawing benefits from a pension from 50 to 55 - people will still be able to retire early, but they will not be able to get their hands on their pension cash until they reach 55.

There is also bad news for millions of future civil servants, teachers and NHS staff - it is proposed that they will need to work until 65 rather than 60 to get their full pension. Existing staff will still be able to retire at 60 if they wish.

Tax simplification

There are no fewer than eight different sets of tax rules in use for pensions, each with its own annual limits on contributions and benefits, and this complexity - which "challenges even the experts", according to the government - is seen as one reason why people are put off saving.

These will be swept away and replaced with a single, lifetime limit on how much someone can save and in a pension while retaining tax relief. It proposes this ceiling should be set at £1.4m, which, it says, is broadly equivalent to the amount someone could build up in a pension by saving up to the current maximum limits over a typical working life. There would also be an annual limit of £200,000.

Under these new rules more than 99% of the population would be able to save more in a pension and enjoy the associated tax relief than under the current rules.

Also proposed is a single set of rules covering the payment of pensions. In future, the amount of the tax-free lump sum people can take would be set at 25% of the value of their fund. This means many occupational schemes would be able to pay out more generous tax-free lump sums than the current rules allow.

Flexible retirement

The government says that enabling people to work a few years longer can make a huge difference to their eventual income in retirement. To help those who wish to carry on working until they are 65 and beyond, it is proposing a rule change to allow people to "phase in" their retirement.

This would mean that people could carry on working part-time for the same employer while receiving part of their company pension. At the moment someone aged 57, for example, cannot continue to work for their company and draw a pension, but they could work for another business. The proposals remove this anomaly.

To improve the incentives for those who want to carry on working, ministers are planning to increases to the extra state pension people get by deferring. So a single worker who has built up £100 a week state pension and second pension entitlement could choose to retire at 70 and get £152 a week instead. If they opted to take a lump sum instead of the enhanced pension, they would receive a one-off payment of around £20,000 as well as their pension of £100 a week.

The government also wants to legislate against age discrimination, end compulsory retirement ages "except where there is justification", and provide extra back-to-work help for those aged 50 and over.

In order to reflect the fact that people are living longer, the government proposes raising the normal pension age for all new public sector workers to 65 from 60. This covers millions of new civil servants, teachers and NHS staff.

However, it has ruled out raising the state pension age - a move that was proposed by several pension organisations on the grounds that it would release billions of pounds that could be used elsewhere in the pensions system - saying that this would disproportionately affect the country's poorest workers.

Greater protection for scheme members

The green paper proposes beefing up workers' rights where employers wind up pension schemes. Senior executives who retire early to secure bumper pensions shortly before their companies go bust could be stripped of some of their retirement cash.

The government is also proposing a fairer sharing-out of the assets when pension schemes are closed down. Workers close to retirement could be given higher priority. There are also plans to set up a pensions watchdog focusing on protecting scheme members.

Incentives and encouragement

Companies could be allowed to insist that new recruits join the in-house pension scheme if one of the suggestions in the green paper is made law.

The government intends to make it easier to save by introducing a range of simple, low-cost pension and investment products where the maximum companies will be able to charge for managing people's money is 1% a year.