The Government today confirmed its plans to replace the current state pension with a simple, flat rate system that would pay around £140 a week.
Chancellor George Osborne said the current system was "unbelievably complex", leaving many people unsure about how much they would receive from the state and whether savings they made would be clawed back through the loss of means-tested benefits.
The new system will provide a flat level of support, which is greater than the amount people currently receive through the basic state pension and means-tested pension credit.
It will still be based on contributions and will not cost more than the current system. The reforms will not apply to today's pensioners and are likely to take years to come into effect.
The Department for Work and Pensions will publish a Green Paper shortly, looking at the options for reform.
Work and Pensions Secretary Iain Duncan Smith signalled that the Government planned to reform the state pension earlier this month, when he said he wanted a system that was easy to understand and rewarded those who saved.
A move to a flat-rate system is likely to particularly benefit women, who often do not receive a full state pension as a result of taking time out of work to look after children.
It would also help people who currently qualify for the pension credit, but do not claim the money, either because they think the process is too complicated, or because they find it demeaning.
The case for reform has become particularly pressing ahead of moves to auto-enrol workers into company pension schemes from 2012.
The Government has been warned that if it does not simplify the system it could face a major mis-selling scandal in future years, when people who had saved only modest amounts found they would have been better off not to have bothered.
Joanne Segars, chief executive of the National Association of Pension Funds, welcomed the move.
She said: "This is a turning point for pensions in the UK. Over half a million new pensioners a year will get a simpler and more generous state pension, and reliance on means-tested benefits will be slashed.
"For too long we have put up with one of the most complicated and meanest state pensions in Europe.
"This reform provides a clearer foundation for saving for old age. For the first time in a generation, people will know that it pays to save."
Helen White, acting director of life and savings at the Association of British Insurers, said: "The announcement to establish a flat-rate payment is an important move towards a simpler and more understandable pension system.
"It will help people plan for their retirement, stop people falling into the means-testing trap and ensure that it always pays to save."
But shadow pensions minister Rachel Reeves said: "Yet again the Government have announced a flat-rate pension with no details at all.
"While we continue to support the simplification of the state pension system, the Chancellor's statement is just another promise of 'jam tomorrow' that does nothing for pensioners today."
The Chancellor also announced plans to look at automatically increasing the age at which people can start drawing their state pension in line with rises to life expectancy, to ensure the cost of people living longer is shared more fairly between the generations.
Mr Osborne also said the Government accepted former Labour Minster Lord Hutton's proposals to reform public sector pensions as a basis for consultation with workers and the unions.
The proposals include moving workers off final salary pensions onto ones based on average earnings during their career, and increasing the normal pension age to be the same as the state pension age.
Mr Osborne added that similar changes should be made to MPs' pensions.Reuse content