DWP to announce simplified state pension

Work and Pensions Secretary Iain Duncan Smith will announce today the government is ready to reform the state pension to a flat-rate payment.

In a speech to Age UK, Duncan Smith will pledge to "fundamentally simplify" the pensions system by removing complicated top-ups and means-testing.

The announcement of state pension reform was originally expected by the end of 2010. On 4 March, Saga secretary general Ros Altmann said the plans were imminent but complications with contracting out were behind the hold-up.

Duncan Smith will not reveal a figure for the new flat-rate pension today, although this is widely anticipated to be £140 per week per person.

Currently, the state pension is £97.65 per week for men and women, with additional pension credit topping this up to £132 per week subject to means testing.

Duncan will say: "We have to fundamentally simplify the system, and we have to make it crystal clear to young savers that it pays to save.

Shadow pensions minister Rachel Reeves says: "These are plans for new pensioners in the future. Vague promises of 'jam tomorrow' do not do anything for pensioners today and with higher VAT and fuel prices rising they want help now.

"Labour supports a fairer, simple state pension system but we want to see the detail. Who will be better off and who worse off under this system?"

Tom McPhail, head of pensions research at Hargreaves Lansdown, says: "A simple, universal state pension will minimise the risk of people opting out of the auto-enrolment process, due to start next year.

"It will also ensure that everyone has a clear expectation of what the state will deliver for them, helping them to plan how much they need to save on top in order to deliver the retirement income they aspire to.

"This will be good news for the pensions and savings industry, which will find it easier to engage with investors and to help them build up private savings on top of their state entitlement."

McPhail warns the reform can only be achieved by abolishing contracting out for final salary schemes, but says this is worthwhile.