Budget 2011: £140 a week state pension planned
Work and pensions secretary Iain Duncan Smith and pensions minister Steve Webb have previously outlined reforming the state pension, where means-testing is scrapped and a flat rate is paid to all pensioners.
In today's Budget George Osborne reiterated these proposals, but warned that it would not apply to current pensioners, and that it would "take years to come into effect".
The Department for Work and Pensions will shortly publish a green paper to consult on options for reform, with a single tier pension one of the options.
The government said in the Budget report:
"Moving to single tier provision would end contracting out for deﬁned beneﬁt pension schemes. In itself, this could bring signiﬁcant simpliﬁcation to the personal tax system. However, the government will investigate the potential impact on employees and schemes in both the private and public sectors. The government will honour contributions to the current system."
Osborne announced that he wanted a "fairer pension system for future pensioners" that "provides simple, contributory, ﬂat-rate support above the level of the means tested guarantee credit".
He added: "The state pension system is complex. It is not clear to working-age individuals what they might receive from the state, in particular from the state second pension, making it difﬁcult to plan retirement saving."
According to the chancellor, changing to a flat-rate pension would not cost any more than the current system.
At present anyone over the age of 65 is entitled to a basic pension of £96.65 a week.
On top of this there is the means-tested element for lower earners – known as pension credit – which can take pensions up to £132.60 a week for a single person and £202.40 for couples.
Malcolm Small, director of policy at the Tax Incentivised Savings Association, agrees that simplifying the state pension system is essential.
He says: "The confirmation of a move towards a new single tier pension at a flat rate and currently worth around £140 per week is t good news. The sooner this is implemented the better.
"However we do need to see further details about the level of contributions that this will be based on as this implies a continuation of a means-tested benefits regime, which would be undesirable."
Rob Pearce, head of HSBC workplace retirement services, adds: "A flat non-means-tested pension benefit is a positive move. It lays the foundations for pensioners to enjoy a secure basic income in retirement, which can be topped-up through personal or workplace savings."
"It might be seen as a trade-off for an increased state pension age, but I believe it should be welcomed."
Osborne also said the government will bring forward proposals to manage future increases in the state pension age 'in response to increases in longevity'.
He said he hoped he could get cross party support to do regular independent reviews of the implications of longevity changes, which would then trigger state pension age rises when needed.
The government has already brought forward the rise in the state pension age from 65 to 66 to 2020 from 2026.