'Scrap means-tested pensions'

Ministers should end means-tested pensions and replace them with a single payment of £105 a week to all people over 65, a leading think tank demanded today.

The Pension Policy Institute called for a "citizen's pension" to guarantee a minimum level of income which would be linked to earnings.

The institute said the current system - in which payments depend on contributions made over a working life through the National Insurance regime - was too complicated.

Three different systems currently run in parallel: The basic state pension, the second state pension and the pension credit, which has recently replaced the minimum income guarantee.

Under this scheme a single person is paid at least £102 a week on retirement, while couples qualify for at least £155.80 a week.

The institute wants to replace it with a single flatrate £105 a week for all pensioners, following a scheme which is in place in New Zealand. There, a residency qualification entitles the elderly to payments rather than work history and contributions to National Insurance. Recipients need to have been in the country for 10 years.

The institute said its proposals could benefit many pensioners - particularly women who have interrupted work to have children and look after them while young.

Director Alison O'Connell said: "Pensioners don't like means-testing because they have to explain why they don't have enough money."

The PPI proposals would see its pension payments linked to earnings, rather than to inflation as at present.

The Tories want the basic state pension to be linked to earnings.

The institute also admits the retirement age may have to go up to 67 in 25 years' time to cope with the extra financial demands posed by an ageing population.

The report comes as Chancellor Gordon Brown prepares to press ahead with pensions reform in his Budget later this month.

Mr Brown wants to simplify the eight different tax regimes which apply to pensions - rolling them all into one. In particular he wants to cap pensions savings at £ 1.4 million before they attract extra tax in a move which he said would hit only 5,000 people while pensions consultants said up to 600,000 could be affected over time.

Mr Brown, who has also fought off Downing Street protests over the plan, threatened to drop the whole thing if he was not supported by the National Audit Office.

Yesterday the NAO approved his figures - but with a string of qualifications. It said some 10,000 people, not 5,000, could be hit by the scheme on day one.