Pensioners: Support for old 'still lowest in Western world'

The restoration of the link between earnings and increases in the state pension will start in 2011, sooner than was planned under the last government. What is markedly different is the putting in place of what Chancellor George Osborne called a "triple guarantee", meaning that the state pension will rise in line with earnings, prices or 2.5 per cent – whichever is the greater.

"This still leaves the basic state pension as the lowest in the developed world but will mean in future it will rise faster," said Ros Altmann, a former Government adviser on pensions.

The pensions credit will rise by the same amount each year as the basic state pension but this will mean that the gap between the two will not grow, which, as Ms Altmann points out, will have an effect, long term, on the number of claimants.

"[The] Pension Credit will gradually become less generous though, as it will only be increased by the same cash rise as the full basic state pension. For example, if the basic state pension rises by £3 a week, or 3.1 per cent next year, the same cash increase would increase the Pension Credit by £3 a week, which is an increase of just 2.3 per cent.

"If these changes were repeated over many years, eventually the state pension would rise to the Pension Credit level, " Ms Altmann said.

"As the Pension Credit becomes relatively less generous and state pension becomes more generous, this will reduce the number of pensioners eligible for means testing."

At the same time, the Chancellor pledged to accelerate the move to an older state pension age of 66 and to review the default retirement age.

Pensioners may be most relieved about what was not in the Budget rather than what actually was. The winter fuel allowance, widely reported to have been under threat, will stay, as will free bus travel for elderly people.

Those approaching retirement may be pleased that the Government says it will carry through its pledge to end the practice of forcing people to use their pension pot to buy as annuity – a guaranteed income for life by age 75. From April 2011, savers will be free to leave their money in their pensions for longer.

For those looking ahead to saving for their retirement, there was little light thrown on the future shape of UK pensions. The long-trailed NEST national workplace saving scheme, due to come into place from 2012, is still dogged by uncertainty over the size of contributions and whether or not employees will be auto-enrolled into the scheme.

Likewise, there was no indication on how the Government plans to increase the flexibility of personal pension schemes, which have been dogged by underperformance, complexity and mis-selling in recent years. The savings gateway, which was designed to supplement the savings of low income groups and was set to roll out around the country in July, has been shelved.