Pensioners sprung from the savings trap

A new credit scheme that pledges to ensure we can retire in comfort

For years, people were told by successive governments that they should save for their retirement. But the rhetoric wasn't matched by the reality. People did what they were told, they saved, and perhaps they were punished for doing so.

For years, people were told by successive governments that they should save for their retirement. But the rhetoric wasn't matched by the reality. People did what they were told, they saved, and perhaps they were punished for doing so.

All of us know a pensioner in the unfair situation of being worse off precisely because they put money aside for their retirement. They have "too much" in the bank to qualify for the help that others get, but too little weekly income to be anything close to financially comfortable. The Pension Credit will change this. It's the next step in our programme of long-term reforms to make sure everyone can have a secure retirement.

Our first priority was to get more money to those pensioners who were really struggling to make ends meet through the Minimum Income Guarantee (MIG), which we are increasing to more than £92 next April. But we also wanted to stop pensioners being penalised for saving, and instead reward them for their prudence.

The Pension Credit will spring millions of pensioners from the savings trap by making sure they are better off for saving. When it comes into effect in 2003, it will provide a cash top-up for the 5.5 million pensioners with an income of less than £135 a week - that's £200 for pensioner couples. It will do this by giving them a cash credit for every pound they save, to boost their weekly income above MIG.

Let me give a practical example of how the credit will work. Take a 70-year-old pensioner who lives alone. he or she gets the basic state pension of £77 a week plus a small occupational pension of £20 a week. We would top up their income to £100 a week - the projected level of MIG in 2003 - then give them a credit of 60p for every pound of occupational pension they get. Thanks to the credit, this pensioner's new total income will be £112 a week - £15 more than before.

And we're also making sure that more pensioners will be eligible for either MIG or the credit by abolishing the arbitrary limits imposed on capital and savings. Instead of looking at how much pensioners have in the bank, we'll concentrate on how much income they get from their savings.

And all pensioners will benefit from the measures announced by the Chancellor, Gordon Brown, to lift even more of them out of tax and reduce the burden on pensioners who still pay tax.

The important point with all of these new measures - MIG, the Pension Credit and increased tax allowances - is that they mark a distinct move away from the outdated idea that one pension policy fits all.

Thanks to the growth of occupational pensions, the gap between the country's richest and poorest pensioners is now wider than at any other time in the past 40 years. We will only be able to achieve our stated aim of ensuring that every pensioner shares in the rising prosperity of the nation if we recognise that all pensioner incomes are not created equal.

And we will only be able to deliver on our commitment to give everyone a secure retirement in the future, through Stakeholders and the State Second Pension, if we can send a clear message to tomorrow's pensioners that it pays to save.

Through the Pension Credit, we have met both of these challenges.

* Alistair Darling is the Secretary of State for Social Security.