The possibility of a means-tested state pension has made headlines in recent weeks, as Britons brace for the “painful” October Budget. While Labour has not suggested they will means-test the state pension, the idea has been floated amid concern about the affordability of the payment as the population lives longer.
Sir Edward Troup, a former executive for HM Revenue and Customs (HMRC) and an adviser to Chancellor Rachel Reeves, recently suggested a “debate needs to be had” around pensions. He added: “We can all think of the wealthy individuals in this country and say, well, do we think he or she should have a full state pension?”
However, means-testing the state pension would be a “hugely controversial move” which would not only hit rich pensioners, but also millions of working age people.
Sir Steve Webb told GB News: “It would alienate not just today’s pensioners but many millions more who are coming up to retirement and would see their plans rewritten.”
The former pensions minister pointed out millions of pensioners already pay back 20 per cent or more of their state pension through income tax, and said “going further would be very badly received”.
He added: “One of the biggest concerns is that the progress which has been made in encouraging people to save for retirement through automatic enrolment into workplace pensions could be undone.
“If people knew that having a private pension income would simply reduce their state pension they might opt out of their workplace pension and enjoy the money now. This would be a hugely backward step”.
One of the biggest risks of implementing the policy would be that if people are penalised for having saved for their retirement – in that they could end up getting a lower state pension – it could put people off saving in the first place, Sir Steve said.
Automatic enrolment has has brought more than 10 million people into pension saving, many of which are on modest incomes.
If the private pension income subsequently deprived someone of part of their state pension, many might wonder if it is worth saving into a private pension pot, when they could instead enjoy more of their income during their working life.
As such, means-testing the state pension “could seriously undermine the drive to get more people providing for their own retirement,” the pensions expert said.
Adrian Lowery, financial analyst at wealth management firm Evelyn Partners, thinks a means-tested state pension policy is unlikely.
He told GB News: “The Government has tied itself to the triple lock, so if it decided it needed to save money on the state pension within this Parliament, means testing might be one of the only ways it could do so, which is possibly why this issue has reared its head recently.”
However, means-testing the state pension couldn’t be introduced immediately, he said, explaining: “It would be administratively tricky and costly, and people need warning that they could be in for lower payments than they have always been promised”.
Lowery also suggested the bar would “have to be set pretty low” in order to make “significant” savings – which would likely prompt a lot of backlash.
He pointed to the outcry over the Chancellor’s recent decision to means-test the Winter Fuel Payment – an annual payment of up to £300 to help pensioners during the winter.
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He added: “The contributory nature of the state pension via National Insurance contributions (NICs) makes means-testing it very controversial – the system relies on a sense that people get back what they pay in, and could fall apart if that link is broken.”
The means-testing of the Winter Fuel Payment, which was going to be worth up to £300 to pensioners this winter, has sparked a huge outcry, with particular concern for those who only just miss out on the payment.
From this year, eligible people, born before September 23 1958, must live in England or Wales and get one of the following benefits:
- Pension Credit
- Universal Credit
- Income-related Employment and Support Allowance (ESA)
- Income-based Jobseeker’s Allowance (JSA)
- Income Support
- Child Tax Credit
- Working Tax Credit
GB News has heard from people who narrowly miss out on Pension Credit due to their income being very slightly over the Pension Credit threshold. They will now miss out on between £200 and £300 via the Winter Fuel Payment.
One person told GB News: “I feel lucky to have a very small private pension which supplements my state pension, but it certainly does not allow me to live a comfortable life, worry free… The Winterfuel allowance would have made such a difference to those of us who have never ever claimed any kind of benefit.”
Prime Minister Keir Starmer and Chancellor Rachel Reeves have said the decision was necessary to help address a £22billion “black hole” in the public finances this year that they inherited from the Conservative Government.
