Despite Brown's Pension Credit, does it really pay to save for one's old age?

Millions of pensioners will be able to apply for the new Pension Credit from April - six months before it comes into force in October 2003.

Half of all pensioners aged 65 or over are expected to qualify. Those already in receipt of the Minimum Income Guarantee benefits will not have to lodge a claim - but millions of others will need to complete forms from the Department of Work and Pensions.

The credit will be payable to single people aged over 64 with a total income of under £139 a week and to couples on less than £204. Some disabled people, carers and homeowners with mortgage interest costs will be eligible even if their total income is slightly higher. Full details will be available in April from the Government and organisations such as Age Concern.

The aim of the new credit is to reward people who have built up small savings and pensions of their own and who currently lose out on the state benefits for which poorer people qualify. In his pre-Budget statement, the Chancellor quoted some typical benefit rates - an extra £11.60 a week through the credit for a single pensioner on weekly income of £110 and an extra £21.50 for a couple on £150 a week.

The Government estimates that 'around half of all pensioner households will be entitled to £400 extra a year on average through the Pension Credit, with some getting up to £1,000 a year'.

Although no one will be worse off as a result of the Pension Credit, Tom McPhail of adviser Harg reaves Lansdowne believes it is seriously flawed: 'A lot of people won't claim it because they won't realise they are entitled and they won't understand it.'

And Sally West of Age Concern says: 'It is going to be difficult for people to work it out.'

Most people who qualify for the Pension Credit will still be getting a raw deal on their savings - receiving a credit worth 60p for each £1 of benefit they would have been entitled to if their savings were slightly less. This is equivalent to a marginal tax rate of 40 per cent. The marginal tax rate for some eligible claimants will still be more than 90 per cent.

McPhail says: 'This savings disincentive is going to be fairly counterproductive for some people in their 40s and 50s. They may see the Pension Credit and, if they can understand it, come to the conclusion that it's not worth putting money into their pensions.'

Anyone who ends up with a pension fund or sav ings of £40,000 or less - in today's figures - is likely to fall into the Pension Credit regime, effectively being taxed at 40 per cent.

Some people may start to consider the alternatives - relying on the state benefits (£102.10 for a single person from next April, £155.80 for a couple) and spending their money now or putting it into buying their house or simply having small amounts of savings. Sums under £6,000 in savings will be excluded from Pension Credit calculations.

· Age Concern's free leaflet, 'The Pension Credit - Questions and Answers', is available on 0800 009966.