Plans for a new single flat-rate state pension, which could be introduced by 2017, have been announced by pensions minister Steve Webb.
Under long-awaited proposals outlined in a white paper published today, the state pension will be simplified to a flat payment of £144 a week. This contrasts with the current situation where a basic state pension of £107.45 can be topped up to £142.70 via means-tested pension credit or the second state pension.
The single state pension: a simple foundation for saving also details plans to abolish the contracting out of the second state pension for defined benefit pension schemes.
People will face an increased qualifying period in order to receive the new flat rate pension, with 35 years of National Insurance contributions required, and not 30 years as is currently the case for the basic state pension. Anyone who with fewer than 10 years of contributions or credits will not receive the pension at all.
According to the Department for Work and Pensions, the reforms will mean that 750,000 women who reach pension age in the decade after the changes are introduced will receive an average of £9 more a week. Self-employed people will also be brought fully into the state pension system.
Over 80% of people reaching the state pension age by the 2040s will receive the full weekly amount of the single-tier pension, it added.
Webb said: 'The current state pension system is too complicated and leaves millions of people needing means-tested top-ups. We can do better. Our simple, single tier pension will provide a decent, solid foundation for new pensioners in an otherwise less certain world, ensuring it pays to save.'
Announcing the plans in the House of Commons, Webb said there would be no further changes to the state pension age until 2015 at the earliest. The government will review the state pension age in each parliament, a process that will be informed by the Government Actuary's Department.
Joanne Segars, chief executive of the National Association of Pension Funds, said the 'much-needed' shake-up of the state pension system would ultimately help millions of pensions and savers.
'For the first time in a generation, people will know that it pays to save, and that whatever they put aside won't be eroded by means-testing when they retire,' she explained.
Otto Thoreson, director general of the Association of British Insurers, added: 'A simple approach to state pension provision is a key element in ensuring the success of pension reform.
'With greater clarity about what the state will provide and automatic enrolment to encourage people to make additional provision for their retirement through the workplace there is a real chance to create a savings culture in the UK. We welcome today's proposals to take forward this legislation.'
However, Andrew Vaughan, chair of the Association of Consulting Actuaries, warned that the single-tier pension was likely to deliver less than 30% of the income people might require to maintain their current lifestyle when they retire. The minimum contributions from auto-enrolment might add a further 15%, he noted.
'This level falls well short of the replacement income most people will need - we must drive up pension contributions. A key to this will be that by 2017 employers can offer a range of new "defined ambition" pensions that offer employees greater pension certainty whilst also allowing employers the ability to cap the cost of such schemes in a way they cannot with the current defined benefit regime.'
Vaughan called on the government to press ahead as quickly as possible with carrying out the reforms it set out in its Reinvigorating workplace pensions strategy, published last year.