Could the state pension end up being means tested before I receive it?

I’m 49 and have read reports that the state pension could end up being means-tested.

I realize these are just rumours, but I’m worried it could happen before I reach retirement age, especially after the removal of the winter fuel payment and the budget move to include pensions in inheritance tax .

I am a higher rate taxpayer, earning £60,000 a year and have £200,000 in my defined contribution pension fund, which I have been saving into since I started working at age 21.

Could the state pension end up being means-tested and would probably be based on income, the size of the pension fund, overall wealth or something else?

This is Money’s Jane Denton responds: I asked the Department for Work and Pensions whether state pensions will be means-tested in future.

A DWP spokesperson told This is Money: ‘The Government has no plans to means-test the state pension.

“We are committed to supporting pensioners – millions of people will see their state pension rise by up to £1,900 in this parliament through our commitment to the triple lock.”

According to the DWP, as of May 2024, 12.9 million people were receiving the state pension.

The full state pension is currently set at around £11,502 a year, while the basic version, for retirees who reached state pension age before April 6, 2016, is lower.

The triple lock means the state pension increases by the higher of average earnings growth, inflation or 2.5 per cent each year.

Currently, the state pension does not depend on financial resources. The British approach to state pensions differs from countries such as Australia, where it is means-tested.

Rather than being means-tested, eligibility for the state pension in Britain is based on people’s national insurance history. It is the NI payments or credits that people make that determine whether they receive the full state pension or not.

The state pension age has been gradually increasing and is already expected to rise to 67 years in 2028 and 68 years in 2046. Simply put, people are having to wait longer to receive their state pension.

Pressure on pensioners

In some respects, concerns are understandably growing about state pensions becoming means-tested. Rachel Reeves’ recent policy changes have left many pensioners reeling.

Chancellor Rachel Reeves has withdrawn winter fuel payments from around 10 million pensioners to help plug what she called in July a £22 billion “black hole” in public finances. However, critics have pointed to recent public sector pay increases above inflation.

Inherited pensions are not currently counted for inheritance tax purposes, but thanks to the latest Reeves Budget, they will be included from April 2027.

Reeves said the Government was bringing pensions into the realm of inheritance tax to stop people using them “as a vehicle for inheritance tax planning”.

Pension review on the horizon

In the Budget, Reeves said the Government would maintain the triple lock on state pensions for the duration of the current parliament. The basic and new state pension will increase by 4.1 percent on April 6, 2025.

While the DWP told This is Money there are no plans for means-tested state pensions, pensions are under scrutiny.

In July, Reeves promised a “landmark review of pensions” to “boost growth and improve the situation across Britain”.

It is unclear whether this review will lead to further debate or consultation on the possibility of means-tested state pensions, but at the moment this seems unlikely.

My intuition is that any hint of such a policy would be met with vehement opposition and deeply unfavorable political consequences for the government in question. It would also be onerous to introduce from an administrative perspective.

I have spoken to Dennis Reed, director of seniors charity Silver Voices, and Ed Monk, associate director of personal investments at Fidelity International, to get their views on whether or not the state pension is likely to end. be subject to means testing and how this might work in your case.

The Government “wants to know the income of pensioners”

Dennis Reed, director of Silver Voices, said: Silver Voices is very concerned about speculation that the Government is considering future means testing of state pensions.

Our suspicions have been reinforced by reports that the upcoming Fraud, Errors and Debt Bill will continue Conservative plans to give DWP investigators broad powers to require banks to provide information about the financial circumstances of 12 million state pensioners.

As the state pension is a universal payment, regardless of income, fraud in terms of income statements is irrelevant, unless there are plans in place to means-test the state pension under the Labor Party.

Pensioners’ early aim to save by removing the winter fuel payment for the vast majority does not bode well for the preservation of older people’s existing rights under this Government.

Ed Monk, associate director of personal investments at Fidelity International, said: Now, at 49, you are eligible to receive your state pension in 18 years, when you turn 67.

Whatever the rumors about possible changes to the state pension, it still makes sense to make sure you get the maximum possible when you get to that point.

This means completing 35 years of national insurance contributions. These may include years spent in caregiving or receiving work benefits, as well as those spent in employment. If you are missing years, do what you can to make additional contributions to make up for them.

The full state pension is a very valuable benefit because it is an income that is guaranteed and updated each year. These things are very expensive to replicate in other ways.

For example, recreating the current full state pension of £11,502.40 a year would require around £230,000 of pension savings.

But its value to individuals also makes its provision very expensive for the Government, especially since the introduction of the triple lock which increases it each year by the highest of wages, prices or 2.5 per cent.

This will make the state pension increasingly expensive and some think it could soon become unsustainable.

Thanks to the triple lock, pensioners’ payments have risen from just £185.15 in 2022/23 to £221.20 this year, an increase of almost 20 per cent in two years. That is very expensive for a government that is short of money.

Perhaps that is why state pension reforms are back on the agenda, although it would be politically very difficult to make significant changes.

In this year’s elections, both major parties promised to maintain the triple lock. The Conservatives even promised to add another protection to ensure the normal full state pension remained completely tax-free. This shows how reluctant politicians are to make state pensions less generous.

Means testing would be the most radical reform the Government could make.

It would completely upend the plans of people who have organized their finances around getting paid when they retire.

Meanwhile, it would create perverse incentives for people not to save for their future, so that they do not risk losing their state pension due to a means test at a later date.

Remember that many of those who would presumably be denied a state pension because of their wealth have already had their ability to save tax-efficiently on pensions through the phased annual allowance drastically reduced or completely removed.

It is very difficult to see how a means test for the state pension could be introduced without first making less drastic changes, such as removing the triple lock or reducing the cost of pension tax relief.

That’s no guarantee that it couldn’t happen one day – it’s up to governments to set tax and spending policy – but it does make a means test highly unlikely.