The overhaul of the pensions system should encourage people to save more, the government has claimed.
Work and Pensions Secretary Iain Duncan Smith and pensioners minister Steve Webb have announced a reform of the system with the introduction of a flat rate pension for all, thought to be £140 a week.
At present anyone over the age of 65 is entitled to a basic pension of £97.65 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.
Under the new system all pensioners would receive the same rate, regardless of earnings or career breaks taken to raise children.
Webb has admitted some higher earners may lose out.
Laith Khalaf, pensions analyst at Hargreaves Lansdown, says under the current system higher earners can build up a pension of more than £140 a week through the earnings based portion of the state pension. Under the new system this would not apply.
It pays to save
But Webb says the overhaul will promote the idea that it pays to save.
Speaking before the Commons work and pensions committee he claimed anyone who joined pension schemes in addition to the state system or saved for the future would still be better-off "by a country mile".
Trevor Matthews, chief executive of Friends Provident, says this is the news the industry has been waiting for.
"Our industry has been crying out for a common sense approach to retirement planning and the universal pension proposed is a welcome step towards achieving this," he says.
"The proposal should allow savers in the UK to take responsibility for funding their own financial future by giving a clearer indication of what they can expect at the point of retirement. There are of course still kinks to be ironed out regarding how this new universal amount will be funded but on the surface this seems like a genius plan."