Budget: Pensions pledge so elderly can 'live with dignity'

Budget at a glance

Hear informed debate in a special edition of our BusinessTalk podcast, with experts from Deloitte in Leeds

The measures will see the state pension increase alongside average UK earnings from next April – a year earlier than expected. And future rises will be protected by a new "triple lock", which will guarantee that the basic state pension goes up each year in line with earnings, prices or 2.5 per cent, whichever is the greater.

The changes mean that a single pensioner on a full basic state pension can expect a minimum annual increase from next April of 126.95 or 203 for a married couple.

Mr Osborne said: "We will provide lasting help for pensioners – this earnings link was broken by the last Conservative government and never restored through 13 years of the Labour government.

"It meant that each year more and more pensioners were drawn into the means test, punishing those who had done the right thing and saved for their retirement.

"I can today announce that from April next year we will re-link the basic state pension to earnings. With this coalition Government pensioners will have the income to live with dignity in retirement."

The state pension has fallen further and further behind the cost of living in Britain for nearly three decades after it was linked to retail price inflation in 1980.

Adam Waller, of Deloitte, said: "Previously, the inflation measure used was the Retail Prices Index (RPI) and not the Consumer Prices Index.

"In recognition of this, and for one year only, the basic state pension at April 2011 will be increased by the RPI if this gives a greater increase than the triple guarantee."

There was also no mention of cuts to some pensioner benefits – an issue that provoked heated clashes between David Cameron and Gordon Brown during the General Election campaign.

Mr Cameron had accused Labour of lying about his policies, claiming the party had been telling voters that their free bus passes and winter fuel payments would be cut.

The coalition Government is also scrapping the rule that compels people to buy an annuity with their pension savings by the age of 75. It will be abolished next year, and in the interim the rules will be modified so that those who reach their 75th birthday before this date will not be affected.

A change to the Finance Bill will mean that those pension savers don't have to "annuitise" their pension until their 77th birthday, giving them greater freedom with their savings.

David Brown, senior manager in Deloitte Total Reward and Benefits in Leeds, said: "The Government has confirmed from April 2011 it will end the effective requirement to convert an individual's pension fund to an income at the age of 75. This will improve the lump sum death position for anyone dying between the ages of 75 and 77."

However, the news was less positive for young people as their prospects of a state pension continue to recede into the distance.

Mr Osborne said the state pension age is set to rise to 68 by 2046 with increases to 66 and 67 phased in by 2026 and 2036 respectively. Currently state pension age is 65 for men and women born before April 6, 1955.

The Budget announcement yesterday that the Government will review earlier increases to the state pension age is consistent with the Conservative manifesto that called for it to rise to 66 by 2016.

It is also understood that the Government may be considering accelerating this process and further consultation will take place before a final decision is announced.

The coalition will also consult on phasing out the default retirement age, which companies can use to force their staff to to stop working.