Will Labour begin testing state pension livelihoods? How would it work?

I decided to take early retirement in 2020, just before the pandemic hit.

I will be 66 in August and will receive my state pension from the beginning of September.

I have been contributing to NI for 46 years and look forward to receiving my full state pension, which I feel I have more than contributed to over the years.

I have read that the new government is considering means testing state pensions.

I would be interested to hear your thoughts on this and what you would possibly consider as a means test and how that would affect the state pension.

This is Money’s Tanya Jefferies responds: You are not the only reader who has written to us about this since the election.

Labour has said nothing to justify their suspicions, but it will undertake a major pensions review, and a change of government is certain to raise concerns about disruption to financial issues that seemed settled.

Since a major reform in 2016, the way to qualify for the state pension is to build up a National Insurance record over 35 years, either by paying contributions through employment or earning annual credits due to extenuating circumstances such as caring duties, ill health or unemployment.

Legacy rules due to the now-abolished second state pension “opt-out” system (also called SERPS) mean some people with qualifying years over 35 could still receive less than the new full state pension, now worth £11,500 a year.

Some people who signed up and reached retirement age before April 2016 are also getting less, while those who signed up may get more.

You don’t say whether outsourcing affects you, but you or anyone else can check. State pension provision and them National Insurance Registry on gov.uk.

People who can afford it can buy voluntary top-ups to their state pensions if they are years away from qualifying, or defer their state pensions to improve their payments.

So will Labour take a different view of the system as it stands and take the frankly radical step of cutting state pensions for those who are better off?

We asked a finance chief who has experience of both our own state pension system and the means-tested Australian version to answer your question.

Mike Ambery: Australia’s means test is based on income received from all sources by a person and their partner

Mike Ambery, director of retirement savings at Standard Life, answers: Unlike most government benefits, the state pension is not means-tested.

Instead, people’s eligibility is determined by their National Insurance history and it is the payments or credits they have made that determine whether people receive the full sum or not.

This approach is such an important part of our retirement system that it is rarely questioned, but several factors have combined to mean there is an element of pressure for reform, or at least a conversation about the current approach.

The main drivers of change are our ageing society and the triple-lock guarantee.

The triple lock in particular is in the spotlight.

It has been one of the most important pieces of pension policy since it was introduced in 2010, ensuring the state pension keeps pace with living costs and has been incredibly beneficial to retirees in recent years when inflation has been high.

While it has been valuable, it has also been expensive to maintain and has been the focus of much speculation about its long-term affordability.

The new Government will have to confront these challenges, but we know from the election campaign that Labour is committed to the triple lock, so the prospect of change in that regard is slim.

However, it may look at other aspects of the state pension as part of a promised pension review to boost its affordability.

In other countries, means tests are used to determine eligibility.

In Australia, for example, the level of the state pension (Age Pension in Australia) is determined by the income received by a person and their partner from all sources. Subject to certain limits, the state pension is reduced by income.

Means-tested reduction could effectively mean that at some income levels no state pension would be paid or that the level of state pension paid would be gradually reduced (in stages) depending on income.

Income would need to be defined and could be simply categorised as money received from other pensions, rental income from housing, savings, shares, equity release from home purchase schemes and even gains from skill or luck.

These earnings are unlikely to be considered as other state-related income benefits.

For any means test to be implemented, there would need to be a system of recording income (similar to a current tax return with HMRC) and the ability to challenge the assessment when people’s incomes vary.

That said, it would be possible for the state to easily implement a means test, but it would likely be unpopular and people’s ability to complete and participate in it could be very difficult as people’s physical and mental capacity deteriorates later in life.

An additional complication is that while proof of income may be relevant, expenses would also need to be taken into account.

In particular, home ownership, rental costs, and healthcare costs can have a dramatic impact on a person’s cost of living. We already see that healthcare costs are subject to a means test.

While some people have, or are on track to have, enough savings in private pensions to enable them to retire comfortably, there are millions who rely or will rely heavily on the state pension.

This might suggest that means testing is a possible avenue, but it is likely to be unpopular.

Looking again abroad, proposals for means testing in New Zealand were rejected because people argued that it is the right of all who have made appropriate contributions.

An alternative to means testing, which has already been used by the government to control costs, is to raise the eligibility age.

The state pension age has been gradually increasing and is already planned to reach 67 in 2028 and 68 in 2046.

There is potential for this to increase further or faster depending on affordability.

However, this approach also poses challenges as it penalises those who are unable to continue working and those in poor health who cannot expect to live much beyond state pension age.

What this highlights is that there are no easy answers for policymakers and the Government will be hoping to deliver on its growth agenda to shore up public finances.

For those who are at the point of becoming eligible for a state pension, the prospect of imminent changes is less.

The Government will want to ensure that people have time to plan ahead and changes to state pensions are typically implemented over many years.