Compulsory retirement ages are to be abolished, allowing people to work beyond 65 if they choose.
The Government has made the change in response to the European Union directive that outlaws age discrimination against older workers from 2006, according to the Sunday Times.
Ministers are braced for a backlash from business leaders who fear they will be saddled with older workers whom they cannot ask to leave. Firms also say they will be hit with a big increase in costs and red tape.
Patricia Hewitt, the trade secretary, and Alan Johnson, the pensions secretary, have decided to delay the change for five years until 2011 to give firms time to adapt.
After that date firms would have to prove, beyond doubt, that older workers were incompetent or incapable of doing their jobs if they wanted to pension them off.
The announcement, due to be made next month, is revealed in a joint letter from Hewitt and Johnson. It was sent to the rest of the cabinet two weeks ago and has been seen by the Sunday Times.
The trade secretary was initially sceptical, preferring simply to raise the retirement age to 70. However Johnson persuaded her that if it was wrong to sack people on the grounds of race, sex or religion then there could be no justification for not including age.
However, the five-year delay could yet be ruled illegal by the European Commission, which requires countries to outlaw age discrimination from October 2006.