State pension system to be reformed

Under the Pensions Bill, the Government will replace the existing "complex" system with a new single tier pension and bring forward an increase in the state pension age to 67 between 2026 and 2028.

Plans to introduce the simple, single-tier state pension of about £140 were outlined in the recent Budget as part of the general drive to encourage people to start putting more aside for their retirement.

Under the current law, the state pension age is due to rise to 67 between 2034 and 2036.

Savings crisis

The reforms follow concerns that people are not being encouraged to save enough for their old age as they are being put off by the current system, which is too complex.

But they also send a strong signal that the age of retirement will continually creep up as the pension system is routinely reviewed to make sure it keeps pace with increased lifespans.

Key Points

• State pension system to be reformed

• New single tier pension to be introduced

• Increase in state pension age to be bought forward

The Government paper says it is "committing to ensuring that the state pension age is increased in future to take into account increases in longevity".

The measures will run alongside a landmark drive to tackle the pensions savings crisis, which will see up to 10 million people automatically enrolled into workplace schemes from this autumn, starting with larger companies.

John Lawson, head of pension policy at insurer Standard Life, says: "If after 2026 the state pension age increases in line with our changing life expectancy, we could expect that someone who is currently 37 won't be able to start drawing their state pension until they are 70 and someone who is 21 won't receive it until they are 75.

"This means that children born in 2012 are unlikely to get their state pension until 80, if life expectancy at retirement rises in line with the last 30 years."

'Step forward'

Joanne Segars, chief executive of the National Association of Pension Funds, says: "This is another big step towards a simpler, more generous state pension that no longer penalises people for saving."

She adds: "We are all living longer, so it is inevitable that retirement ages move upwards to reflect that. The trade-off for working longer must be a better state pension come retirement."

Segars says the reforms will help ensure the drive to automatically place people into pension schemes works well.

Minister for Pensions Steve Webb says: "Our plans will radically simplify the state pension system and set it above the level of the means test, providing a fair and sustainable foundation for pension saving for people of working age."