Business leaders have warned the government that plans to abolish the default retirement age would have a “significant” effect on employers, especially smaller firms.

The Institute of Directors argued in favour of keeping the device that allows companies to retire their workers at 65, saying a better option would be to raise the DRA progressively in line with life expectancy over time to 70.

Employers will be forced to dismiss staff if they want to remove “under-performing” staff over the age of 65, leading to an “undignified” end to some careers, said the IoD.

Miles Templeman, the IoD’s director general, said: “The government’s proposal to abolish the DRA tells us that ministers are less focused than they should be on supporting entrepreneurs and the business community.

“Removing the DRA, which gives employers flexibility in managing employees, is incompatible with the government’s stated desire to boost enterprise and create new jobs. In this era of high unemployment the government should be making it easier for businesses to employ people, not harder.”