Disability benefit cut but those who go back to work will get bonus

The Government will announce the biggest shake-up to benefits for the sick and disabled for 60 years today by removing the financial incentive for people to remain on incapacity benefit.

The Government will announce the biggest shake-up to benefits for the sick and disabled for 60 years today by removing the financial incentive for people to remain on incapacity benefit.

Alan Johnson, the Secretary of State for Work and Pensions, will publish a five-year welfare plan to restrict the level of benefit, which is paid to 2.7 million people at a cost of £6.7 bn a year. For new claimants, the Government will scrap the automatic increases in the level of payments after claimants have been on it for six and 12 months.

Some ministers wanted to cut payments to the less generous level of Jobseeker's Allowance (JSA) for the unemployed or impose a maximum time limit for people to stay on incapacity benefit. But Mr Johnson opposed the idea, winning the backing of Gordon Brown, the Chancellor, for a less draconian approach that will include a £40-a-week bonus for claimants who return to work.

But he has not yet won the support of the Treasury for his "citizen's pension" plan based on residence rather than national insurance contributions, which would lift almost one million pensioners out of poverty.

The scheme, similar to the policy of the Liberal Democrats, would provide significant help for women, only 13 per cent of whom qualify for the full basic state pension. To reduce the £3bn a year bill, the retirement age might be increased. But Mr Brown is wary about the cost and Tony Blair has not yet been convinced.

Mr Johnson will not mention the idea in today's blueprint but is battling for the Cabinet's approval to include it in a "statement of intent" on pensions to be issued before the general election. But Downing Street and the Treasury want to delay decisions on Britain's "pensions timebomb" until a commission chaired by Adair Turner issues its final report this autumn.

Mr Blair said it was a "perverse disincentive" that the scheme rewarded long-term claimants. "At the moment, these rules penalise those who want to manage their condition and return to work," he said.

He said the three key elements in today's proposals would be reforming rules which pay claimants more the longer they are on benefit; providing more support for the most severely sick and disabled and encouraging claimants who engage in rehabilitation and training; and ensuring that nobody was "written off" while expecting everyone to "fulfil their responsibilities" to work if they are able to do so. "Those who play by the rules get the help. Those who don't play by the rules should start playing by the rules," Mr Blair said.

Steve Webb, the Liberal Democrats' welfare spokesman, said: "Seven years ago, ministers were saying exactly the same things. Disability has shades of grey, but the current system is black and white. We need a system that fits people the other way round."