Government eyes reform of basic state pension

The basic state pension needs radical reform and cannot be immune from the Coalition Government's welfare shake-up, Iain Duncan Smith will declare today. The Work and Pensions Secretary wants to scrap the pension credit top-up scheme introduced by Labour for over-60s on low incomes and instead give people more incentive to save. The move could be signalled in the Budget on 23 March.

By simplifying the system and cutting administrative costs, Mr Duncan Smith believes the basic state pension – currently £97.65 a week for a single pensioner and £156.15 a week for a couple – could be raised to a flat-rate pension worth around £140 a week for all pensioners. This would benefit women and carers, who are disadvantaged by the current system because many do not clock up enough national insurance contributions (NICs) to qualify for the full state pension. The new "single tier" pension would be based on residency rather than NICs.

Critics may argue that people who cannot afford to save while they are of working age could be worse off and that the proposal would help better-off pensioners. Any reform potentially carries high risks because there is a high turnout among the 10.5 million pensioners at general elections. But Mr Duncan Smith is confident he can sell the proposed change as fairer and more generous than the present system.

He intends to sweep away means-tested state handouts which, he argues, penalise people who save while working. At present, the £6bn-a-year pension credit guarantees a minimum weekly income of £132.60 for a single person and £202.40 for a couple.

In a speech to the Age UK charity in London today, the Work and Pensions Secretary will say his plans mirror his proposal for a universal benefit for people of working age. "We have to send out a clear message across both the welfare and pension systems – you will be better off in work than on benefits, and you will be better off in retirement if you save," he will say.

Mr Duncan Smith's approach is backed by Steve Webb, the Liberal Democrat minister for Pensions. They are believed to have made progress in their negotiations with the Treasury, which was initially wary. However, such a fundamental reform would have to be phased in over several years.