The basic state pension will double in value by 2050 under the Government's blueprint but most of the extra money that people would have in retirement would be provided by themselves rather than the state.
In a White Paper published yesterday, ministers announced a trade-off under which the state pension would increase in line with earnings rather than prices after 2012 but people would have to work longer before receiving it.
The small print of the document showed the pension income of someone on median earnings of £23,000 would be worth £170 week by 2050 under the current system, £136 of which would come from the state. After the Government's reforms, the same person would receive £219 by 2053, but the Government would provide £139 of it and the individual £80. That means the state would contribute only an extra £3 a week.
The reform will include a scheme to boost private savings into which people who do not have company pensions will be automatically enrolled. They will contribute 4 per cent of their salary, employers 3 per cent and the state 1 per cent through tax relief.
Tony Blair hailed the "bold blueprint" as a "landmark" but admitted the biggest shake-up of pensions for almost 60 years involved "difficult decisions for everyone". He added: "It's a very very big moment if we can get it right. The idea is to make this something that lasts not just for this generation but for the generations to come and that gives us the chance of having a really strong, sustainable, workable, affordable way of people saving for their retirement."
Although the White Paper is based on proposals by a commission chaired by Lord Turner of Ecchinswell, there are some important differences. Lord Turner wanted the more generous rises in the basic state pension to start in 2010 but the Chancellor Gordon Brown delayed the start date until at least 2012 to ensure the move is affordable without big tax rises.
One Treasury source said last night that 2012 was "an optimistic ambition". But the Cabinet agreed that it would happen by the end of the next parliament, which could run until 2015.
Under the Turner plan, the age at which men and women would qualify for the state pension would have risen to 68 by 2050, but the Government is moving faster. As The Independent disclosed yesterday, the age will go up from 65 to 66 from 2024, to 67 from 2034 and to 68 from 2044 - six years earlier than Lord Turner envisaged. No one older than 47 today would be affected by these changes.
John Hutton, the Work and Pensions Secretary, told MPs the basic state pension would be worth only £35 by 2050 in today's terms and 70 per cent of pensioners would qualify for the means-tested Pension Credit top-up scheme. By restoring the link with earnings, only a third of people would rely on Pension Credit in retirement.
He said Lord Turner's plans to base state pensions on a "residency test" rather than national insurance contributions would not benefit women older than 45. Instead, the Government would help up to 270,000 women to receive the full state pension by 2020 by reducing the number of work years they need to qualify to 30. The Tories broadly welcomed the blueprint but warned that an "affordability" clause could allow Mr Brown to delay the more generous state pensions beyond 2012.
Lord Turner said his commission was "overall happy" with a White Paper that was "95 per cent or so" in line with its recommendations. He said the proposed 2012 start date for the earnings link was a "reasonable compromise" and claimed the Government was "very unlikely" to move from it.
'I will have to work an extra year'
Nurse, aged 27, from Wisbech, near Norfolk
"I'm a staff nurse at Cambridge NHS Trust, and 68 is the age of some of my elderly patients. To work to 65 is fine but from then on people should have the option to work part-time, depending on their ability. With the cost of living going up, a lot of people can't afford to invest 4 per cent of their salary in a pension."
Accountant, aged 24, from Balham, London
"I pay 3 per cent into a pension which is matched by my employer. It's good that this will be increased to 4 per cent. Small businesses should be responsible for their employees. The new retirement age of 68 does not bother me - if you are sensible when you are young and invest carefully you will still be able to retire earlier."
Revenue controller, aged 38, from Kingsbury, London
"I will have to work an extra year until I am 66 but I would rather retire at 65 like everyone else - 60 would be ideal. The changes won't make any difference to me. For women, reducing the number of working years to 30 to benefit from the government pension scheme is good because it factors in maternity and childcare."
Business student, aged 29, from Hendon, London
"Women have lots of responsibilities if they have children. If a woman wants to work until they are 68, that's fine, but it should be a choice. I am hoping to set up a business and am happy to pay into pensions for my employees. 60 or 62 is the ideal age to retire, though if people want to work when they are older they should be able to."
Environmental health officer, aged 46, from Southwark, London
"I resent the increase in age, but there's not much that can be done. I have a local government pension scheme and have saved so I can retire when I'm 60. Now I may have to work past that age. But a rise in the state pension is a good thing and I am pleased the link with earnings has been restored."
Events manager, aged 30, from Southwark, London
"I would not be willing to work older than 65 even though I would now be expected to work until 67. I have a private pension and will be able to access it when I'm 55. I want the time to travel when I am not in a wheelchair. People will make more of an effort to invest so they can retire younger and without relying on a state pension."Reuse content