Chancellor Gordon Brown has confirmed plans for a big increase in payments for pensioners and unveiled plans for a new pension credit.

The basic state pension will rise by �5 a week for single pensioners from April this year and a further �3 a week in April 2002.

For couples there will be increases of �8 and �4.80 a week.

A new pension credit is to be introduced in 2003.

It seems this Government are prepared to link everything else to incomes but the pension

Jack Jones, National Pensioners' Convention

Pensioner couples with incomes below �200 and single pensioners with incomes below �135 a week, will receive the new credit, which will rise in line with earnings.

"In this way, it will give recipients more than even the earnings link in the basic state pension would give them," the chancellor said.

Pensioners will also be able to retain the winter allowance and the free TV licence for the over 75s introduced as well as the Christmas bonus.

Further details of this will be unveiled in this year's social security uprating statement, he added.

Means test

The pension credit is designed to reward pensioners on modest incomes who have savings or a small second pension.

Under the current system, the poorest pensioners, on the minimum income guarantee, are effectively penalised for every pound of pension they have built up.

The pensioners' factors that he built into the budget were very good indeed

Bob Worcester, MORI

And those just above the minimum income often find they are little better off than those who have saved nothing.

In an attempt to correct this, the pension credit will give a cash reward for every pound of second-tier pension, earnings or investment income.

Mr Brown will also abolish the weekly means test for this group of pensioners.

No restoration of earnings link

But Mr Brown's measures received a lukewarm reception from pensioners.

National Pensioners' Convention president Jack Jones said his members had been hoping the Chancellor would unveil bigger increases in the basic pension than those announced in November.

He criticised Mr Brown's decision not to give details of changes to the winter fuel allowance and Christmas bonus until next month.

And he said pensioners would be disappointed by the continued refusal to link pensions to earnings.

"It seems this government are prepared to link everything else to incomes but the pension," he said.

"The tax cut will benefit those with savings.

"But our main concern is that the basic state pension needs to be raised to benefit all pensioners and to arrest the extension of means testing for benefits."

Grey power

But Bob Worcester, chairman of polling organisation Mori, believes Mr Brown's measure will hit the right note with the majority of pensioners.

"He hit very effectively grey power because grey power is four times the voting power of the young people because there are twice as many of them and they are twice as likely to vote.

"So the pensioners' factors that he built into the budget were very good indeed."

Pension funds

Mr Brown also laid the foundations for pension funds to take a more flexible approach to their investments, as outlined in this week's Myners Report on the state of institutional investment in the UK.

The Chancellor said he would reform legislation to make it easier for them to invest in start-up businesses and added he would abolish the Minimum Funding Requirement - MFR - which restricts what pension funds can invest in.

No news on annuities

One area left alone by the Chancellor was rules on annuities.

An annuity is income for life bought with the money that has built up in a pension plan, and Mr Brown was widely expected to scrap rules which currently force everyone to have converted their pension money into an annuity by the age of 75.

There has been resentment, especially from those in poor health, who do not see why they should have to hand over money to insurers they feel should go to heirs on their death.