Senior couple with bicycles by sea, woman taking photograph

A major shake-up of state pensions has been unveiled as the government bids to simplify what has the overly-complicated status quo.

The plans – explained in a green paper called A State Pension for the 21st Century – involve a single-tier state pension of about £140 a week to replace the existing combination of entitlements that make weekly payments.

Pensioners today receive about £97 a week but that is boosted by means-tested credits that can lift the figure to £132.60. The current system has come under fire because the means-tested element of the pension can penalise those who have made private provision for their own retirement.

The government claims that its plans will “lift millions out of means-testing and put an end to inequalities in the current system that penalise women, low earners and the self-employed”.

Work and pensions secretary Iain Duncan Smith said: “Over the years, small changes to the state pension system have turned what started as a relatively simple contributory system into a complex mess, leaving people utterly confused as to what the state pension means for them.

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

Pensions minister Steve Webb said: “The current state pension system is dogged by complexity and confusion. It makes it very difficult to save for retirement and leaves millions of people relying on complicated means-tested support.”

Nearly half of all pensioners are currently eligible for means-tested pension credit to top up their state pensions, but about 1.6 million of them don’t claim. That leaves them with basic income below the £132.60 guaranteed credit.

Meanwhile, means-testing has become such a large part of the pensions system that it has led to confusion about whether people will benefit from any savings they have put aside during their working lives. A growing number of people have taken the view that they should not bother saving because any personal gains they make will be offset by lower state help.

The government’s green paper comes ahead of plans to automatically enrol people into workplace pension schemes from next year – a move that could bring up to eight million people into pension savings for the first time.

Andrea Rozario, director-general of Safe Home Income Plans (Ship), a trade body for the equity-release industry, said: “The government’s move to simplify the pension and related benefits system is to be applauded.

“Currently, it is incredibly difficult to judge not only what pensioners are entitled to but how these means-tested benefits may be affected if they seek additional private funding sources, such as equity release.

“This is an initial step towards clarifying the murky waters around this issue. Going forward, we hope to see a system where people can make informed choices and they are not penalised for taking proactive steps to fund their own retirement.”

However, critics said the proposals would do little to help existing pensioners, who are struggling at a time of rampant inflation and cuts to public services.

National Pensioners Convention general secretary Dot Gibson said today’s pensioners would “feel like the ladder’s been pulled up”. She called for a universal state pension paid to all existing and future pensioners “set above the poverty level of £178 a week”.