Will state pension become means tested if you own property or have private pensions? Steve Webb replies

I have been reading a lot in the media lately about the means test of the state pension for people who have a private pension and/or own their property.

Personally, I worry about this and I’m sure I’m not the only one.

Questions that come to mind (I’m sure there are more) are:

1. Is this likely to be introduced?

2. At what level would this be likely to be reflected, for example, would this be the level of private pension and/or the value of the house a person owns?

3. Should the government provide a ten-year notice period for introducing this, as it does with increases in the qualifying age?

4. Would this affect those who are already entitled to the state pension?

Your comments are welcome and will hopefully provide some peace of mind for those already claiming and for those who will claim in the coming years.

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Steve Webb replies: When an ‘old age pension’ was first introduced in Britain in 1909, it was only paid to people with an annual income (income) below a certain level.

But since 1948, the National Insurance old-age pension has largely been paid out regardless of people’s income or assets.

The main exception to this was a period when those still working could see their pensions reduced based on income limits, but these rules were abolished in 1989.

Today, the state pension is payable even to those with the highest incomes, but of course it is subject to income tax, meaning that up to 45 percent of the pension is already being clawed back from the richest.

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In my view, it would be a huge step backwards to introduce any other element of means testing into the state pension system. I also think it’s highly unlikely that this will happen in the near future, for reasons I’ll explain.

The stories you may have read about the financial pressure on the state pension system focus on two things.

First of all, the growing number of retirees, not least because the ‘baby boom’ generation of the late 1950s and early 1960s is now reaching retirement age.

Secondly, the relative decline in the number of employees who have to finance these pensions, partly due to a declining birth rate.

How does the government keep AOW costs low?

There are several things the government could do – and has done – to reduce this pressure, all of which are preferable to taking the means test.

The first is raising the state pension age. After the state pension age for men and women was equalized at 65 years in 2018, the retirement age was increased to 66 years in 2020, and will soon rise again from 66 to 67 years between April 2026 and April 2028.

In addition, the timing of future changes in the state pension age is less clear. The retirement age is currently set to rise from 67 to 68 between 2044 and 2046. But two separate government reviews in recent years have proposed bringing this age forward, usually to the late 30s.

Whatever decision is ultimately made about the transition to age 68, it seems highly likely that retirement ages will continue to rise, and ages of 69 and even 70 have been mentioned in government reviews.

Another option to keep costs within limits is to increase the state pension more slowly. For example, between 1979 and 2010, the annual increase in the state pension was purely linked to price inflation, resulting in the infamous 75 pence increase in 2000.

Since 2010, we have seen a relatively generous top-up process under the ‘triple lock’ rules. But if the government wanted to reduce the future cost of the state pension, it could make the annual increase less generous.

A third alternative to means testing would be to make other changes to the rules to make the provision of the state pension cheaper.

For example, the new state pension is (loosely) based on a 35-year requirement for a full pension, while between 2010 and 2016 you could get a full basic pension for just 30 years of contributions.

If the government wants to save money, it could adjust these types of rules, for example by increasing the target for a full pension from 35 to 40 years.

I have gone into all these examples in detail to show that governments can (and often do) save money on state pensions without resorting to means testing, which most politicians would consider a ‘nuclear option’.

Will the government start with an income test on the state pension?

There are several reasons why I think the introduction of a means test is highly unlikely.

Retirees make up a large and growing part of the population. They are also much more likely than young people to vote.

Even if means testing were to start only with today’s very richest pensioners, voters would undoubtedly suspect that the principle would apply to them too. It is difficult to imagine that a political party is willing to take such a risk.

Assuming that it would be political suicide to introduce a means test for current retirees, what about introducing a means test for those yet to retire?

In this case you get what the politician fears most: all the political criticism and none of the money.

As your question suggests, if such a change were to be made for future retirees, people would need to be notified so they can plan accordingly.

If, as you suggest, a ten-year notice period were to be given, current politicians would announce a deeply unpopular change that would give them no extra money to spend in the next two parliaments. It’s hard to understand how this works politically.

From a pension policy perspective, income testing of the elderly fits very poorly with the current policy of automatically enrolling millions of people in a voluntary occupational pension.

If working people knew that they would receive less state pension if they saved in a private pension, they might well be tempted not to take their company pension. This would ultimately make people more dependent on the state when they retire, not less.

Looking around the world, it is relatively rare for state pension systems to be means-tested, although Australia is a notable exception.

But in Australia, retirement savings in the workplace is mandatory, meaning people have no choice but to build a private pension, even if it reduces their state pension.

In short, I think there is no option for means-testing current state pensions for political reasons, and there is little political benefit in announcing plans to do so in the coming decades.

There are other levers that governments can use to control public pension spending, and I strongly suspect these are the levers they will continue to use.