Chancellor George Osborne set out his plan in the 2011 Budget for a £140 a week flat-rate state pension.

 

But he said the universal payments would not apply to the millions of people who would already be claiming their state pensions by the time the new system is introduced.

 

The move is part of a major shake-up of the state pension that also includes proposals to link the state retirement age to increases in life expectancy.

 

There was no set date given in the Budget for the implementation of the reforms, but the Department for Work and Pensions is due to publish a green paper with its consultations on the options soon.

 

The Government believes the current pensions system is too complex, making it difficult for people of working age to determine what they will receive from the state when they retire.

 

It also says the system takes away the incentive to put money aside for retirement because savers lose out on means-tested pension credits.

 

A £140 flat-rate payment would be more generous than the amount pensioners currently receive through the basic state pension and means-tested credits, especially with inflation expected to push this up to around £155 by 2015.

 

The current full state pension is £102.12 a week for a single person. For the poorest in society, it can be topped up with pension credits to a guaranteed minimum of £137.35 for a single person and £209.70 for couples.

 

But as the new flat-rate pension would not apply to existing pensioners, it would effectively create a two-tier state pension system in the UK for some time.

 

Anyone who has built up 30 years of National Insurance Contributions would qualify for the full amount. Women, in particular, would no longer lose out as caring for a young child or an elderly dependant would count as a qualifying year in the same way as a year in employment.

 

The Chancellor said new system would be “cost-neutral” because it will be funded by the phasing out of means-tested credits and the state second pension.

 

Those receiving a higher pension than £140 a week as a result of state second pension or SERPS contributions built up during their working years would not be penalised, the Government has said.

 

Moving to a flat-rate pension would also signal the end of the practice of “contracting out” of the second state pension, as all National Insurance contributions would go towards the universal payments.

 

In the Budget, Mr Osborne also proposed a new link between the state pension age and life expectancy. He said he wanted “a new, more automatic mechanism for future increases in the state pension age based on regular, independent reviews of longevity”.

 

The pension age for both men and women is already set to go up to 66 from 2020, and then to 67 and 68 in 2036 and 2046. However, linking it to longevity is likely to mean it will rise even more rapidly.

 

The Government is also scrapping the default retirement age of 65 so that workers will have the option of carrying on in their jobs into their 70s or more.