State pension reform to help savers, says Duncan Smith

Watch: Iain Duncan Smith says the current system is too complex

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The government will make it "crystal clear" to young people that it "pays to save" for retirement when it reforms pensions, Iain Duncan Smith has said.

The work and pensions secretary indicated a move towards a flat-rate state pension, removing top-up payments for low earners who do not save.

The government would also ensure fairness for parents who take time off to raise their children, he said.

There is speculation the basic state pension could be set at £140 a week.

Mr Duncan Smith did not set a figure when speaking at an event organised by Age UK, but he said he hoped "in the next three, four or five years ahead to start making the changes".

The current full state pension is £97.65 a week for men and women.

This is topped up for the poorest in society to provide a guaranteed minimum income of £132.60 for a single person, or £202.40 for couples, through the means-tested pensions credit.

In his speech, Mr Duncan Smith said the system was too complex and said means tests discouraged many people from saving anything for retirement.

'Hope and stability'

He argued that the changes would help mothers who currently lose out on their pensions because they took a career break to raise their children.

Watch: Michelle Mitchell of Age UK says it is unclear who the winners and losers would be

The changes - which were not given a target date by Mr Duncan Smith - would be paid for, in part, by savings in administration costs when means testing is scrapped.

Mr Duncan Smith said: "We have to fundamentally simplify the system. And we have to make it crystal clear to young savers that it pays to save."

He warned: "There is always more to be done to help the poorest in retirement. However, having worked to put incomes and rights for today's pensioners on a firmer footing, we have to start turning our focus to the next generation."

Mr Duncan Smith added: "Too often we forget that this isn't just a system for those who are currently retired, but also for those who will need it in the years ahead.

"That is why, together, we must make it work not just now but down through the generations, and make sure we leave hope and stability for those generations to come."

The state pension age is already set to be increased in response to people living longer, with the default retirement age being abolished in October.

The government has moved to require employers to enrol staff automatically in private pension schemes from next year to boost individual savings for retirement.

'Vague promises'

But Mr Duncan Smith said: "Auto-enrolment cannot solve the savings challenge on its own, and we have to be prepared to look at the other side of the equation. We now have to look at the state pension.

"The state pension system is so complex that most people have no idea what it will mean for them now and in their retirement.

"And too many people on low incomes who do the right thing in saving for their retirement find those savings clawed back through means-testing. We have to change this.

"We have to send out a clear message across both the welfare and pension systems: you will be better off in work than on benefits, and you will be better off in retirement if you save."

Chancellor George Osborne announced in last autumn's Spending Review that the state pension age for both men and women would rise to 66 by 2020 - six years earlier than had been planned by the Labour government.

For Labour, shadow pensions minister Rachel Reeves said: "Vague promises of jam tomorrow don't do anything for pensioners today. 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?"

Maggie Craig, acting director-general of the Association of British Insurers, said: "The current system is complicated, confusing and leaves many people uncertain of the benefits of saving.

"These reforms would be a critical step in helping people plan for their retirement by ensuring it always pays to save and people do not fall into the means-testing trap."

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