People will be encouraged to work longer under government plans to phase out the so-called default retirement age of 65 by October 2011.

Currently employers can make staff retire at 65 regardless of their circumstances, but ministers signalled this was set to change as people were living longer, healthier lives.

The proposal to phase out the default retirement age (DRA) is outlined in a consultation document, published today, which will run until October.

However, the government said bosses will still be able to operate a compulsory retirement age if they can "objectively justify it".

The move to phase out the DRA is one of a number of measures the government is taking to help and encourage people to work for longer against the backdrop of demographic change.

Other steps include reviewing when the state pension age should increase to 66 and re-establishing the link between earnings and the basic state pension.

The business department said the consultation also proposes to help employers by removing the administrative burden of statutory retirement procedures.

A department spokesperson said: "With the DRA removed there is no reason to keep employees' right to request working beyond retirement or for employers to give them a minimum of six months notice of retirement.

"Although the government is proposing to remove the DRA, it will still be possible for individual employers to operate a compulsory retirement age, provided that they can objectively justify it. Examples could include air traffic controllers and police officers."

The plans provoked a mixed reaction. Campaigners welcomed the decision, but employers warned the removal of a default retirement age could make workforce planning more difficult.

Chris Ball, chief executive of The Age and Employment Network, called it a "win/win outcome" for employers, but warned that today's move is only a first step.

"Many employers will need to adopt a totally new mindset," Ball said. "They will need to actively plan and assist workers to be able to go on contributing to the success of their organisations.

"This may mean adapting work practices and work places. It will certainly mean providing opportunities to train or retrain and to work more flexibly, and, crucially, actually recruiting people in their 50s and 60s where they may not have done so in the past."

Rachel Krys, campaign director of anti-ageism group the Employers Forum on Age (EFA), said the default retirement age, which was created in 2006, was a "dated and unfair system".

"Its removal is simply common sense," she said. "With rising life expectancies, and people staying fitter for longer, it is archaic to assume that someone's age is an indicator of the contribution they can make to the workplace.

"Employers have nothing to fear from this change. This is an outdated policy and the removal of forced retirement is an opportunity to put policies and processes in place which make the most of an age-diverse workforce."

The Chartered Institute of Personnel and Development (CIPD), which has campaigned for many years to remove the DRA, said the "breakthrough" was "greatly encouraging".

Dianah Worman, the CIPD's diversity adviser, said: "Our research has shown that many employees wish to work past retirement for differing reasons and many employers are already benefiting from allowing such flexibility."

The Confederation of British Industry (CBI) said the proposals will give employers little time to prepare and leave them with unresolved problems. John Cridland, CBI deputy director-general, said: "Scrapping the DRA will leave a vacuum and raise a large number of complex legal and employment questions, which the government has not yet addressed. Employers and staff will not know where they stand. There will need to be more than a code of practice to address these practical issues; we will need changes in the law to deal more effectively with difficult employment situations."

David Yeandle, the Engineering Employers Federation's head of employment policy, said: "Many manufacturers will be seriously concerned about this change in policy, which will make workforce planning more difficult.

"The proposed timetable also gives employers virtually little or no time to alter their policies and practices before such an important change in employment legislation is introduced.

"There is also a real danger that it could open a Pandora's box with the onus being placed on employers to prove whether older employees are capable of continuing in their current role. Inevitably, this could lead to employment tribunal cases from some older employees who have been dismissed rather than allowed to retire."

'An artifical construct'

As a founder member of the EFA, Nationwide building society has been pushing hard for the DRA to be removed. It has allowed employees to work past retirement up to the age of 70 since 2001, once it realised many of its customers preferred to discuss their financial arrangements with older people.

In 2005 it raised that limit to 75 subject to employees passing what its HR director, John Whitehouse, describes as a "gateway test".

"As long as people want to carry on working and there aren't any problems, we're happy to let them do that," he said. "Since then I can't think of any example of us saying to staff, sorry we don't want you to carry on."

Out of an approximate 15,500 employees, Nationwide has 285 over the age of 60 working in all areas of the business. Its oldest branch manager is 60, while its oldest employee is a 76-year-old lady who works part time in its Swindon call centre.

From an employer's perspective, Whitehouse said Nationwide does have to think about issues like succession and benefits in a different way, "but they are not insurmountable things. Arguably these are things companies should be doing anyway. This artifical construct that we all must stop working at 65 is a relic of past usage. It's the stuff of the 1950s."

Today, pensions minister Steve Webb admitted that people face a "hell of a shock" when they reach retirement because of their failure to save.

In an interview with the Independent, he admitted that the basic state pension of £97 a week is "not enough to live on", and confirmed that the government would raise the state retirement age to 66 earlier than planned. He said that around 7 million people are currently not saving enough to meet their retirement aspirations.