The state pension could be lifted to a £140 per week payment with no means testing, according to new proposals.
Currently, the basic state pension is £97.65 per week for single people, and pensioners may qualify for pension guarantee credit, savings credit, and around 30 extra benefits including winter fuel allowance.
The coalition government says removing means testing and paying all pensioners a flat rate will reduce bureaucratic costs and end the ‘indignity' of means testing.
Plans from work and pensions secretary Iain Duncan Smith and pensions minister Steve Webb would mean pensioners get a yearly income of £7,280, or £14,560 for couples.
The proposals are expected to be detailed in a Green Paper before 2011, and ministers aim to introduce the changes by 2015.
"The fundamental problem is that our state pension system undermines private pension saving," says Ros Altmann, director-general of Saga.
"If around half of pensioners are entitled to means tested benefits, their private pensions will be penalised and some may see their whole private pension effectively taken away.
"As we are about to launch a national system of auto-enrolment, and a new national pension scheme specifically targeted at low to moderate earners, we would be at risk of putting these workers into a pension which would ultimately be partly or totally removed from them by the means-test."
Tom McPhail, head of pensions research at Hargreaves Lansdown, adds: "With this reform we would finally achieve a simple, transparent and functioning pension system which would encourage everyone to save for their retirement."
"Final salary scheme members may not welcome this news as it may well mean the end of contracting out for final salary schemes, which in turn will mean a 1.6% rise in their National Insurance rates.
"This will be particularly relevant for public sector scheme members who are already facing a 3% increase in their contributions."
McPhail says the change to state pensions could lead to a ‘bonanza' of contacting out into money purchase pensions, as investors can receive rebates into SIPPs or personal pensions for the next two years.
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