Could the state pension find yourself being means-tested earlier than I get it?

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

I realise these are only rumours but it does concern me that it could happen before I reach retirement age, especially after the winter fuel payment removal and the Budget move to include pensions in inheritance tax.

I’m a higher rate taxpayer on £60,000 a year and have £200,000 in my defined contribution pension pot, which I have been saving into since I started work aged 21.

Could the state pension end up being means-tested, and would it be likely to be based on earnings, pension pot size, overall wealth or something else?

What’s next? People are worried about their pensions after Rachel Reeves’ Budget

Jane Denton, of This is Money, replies: I asked the Department for Work and Pensions whether or not state pensions will be means-tested in the future. 

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

‘We are committed to supporting pensioners – with millions set to see their state pension rise by up to £1,900 this parliament through our commitment to the triple lock.’

As of May 2024, 12.9million people received the state pension, according to the DWP. 

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

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

The state pension is not currently means-tested. Britain’s approach to state pensions differs to countries like 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 record. It’s the NI payments or credits people make which determines whether they get the full state pension or not.  

The state pension age has been gradually increasing, and is already set to increase to 67 by 2028 and 68 by 2046. Put simply, people are having to wait longer to get their state pension. 

Pressure on pensioners 

In some respects, it’s understandable that concerns surrounding the possibility of means-tested state pensions are mounting. Rachel Reeves’ recent policy shifts have left many pensioners reeling. 

Chancellor Rachel Reeves has withdrawn winter fuel payments from around 10million pensioners in order to help cover what she called in July a £22billion ‘black hole’ in the public finances. Critics have, however, flagged recent above-inflation public sector pay rises. 

At present, inherited pensions are not counted for inheritance tax purposes, but, thanks to Reeves’ latest Budget, will be included from April 2027.

Reeves said the Government was bringing pensions into scope for inheritance tax purposes to stop people using pensions ‘as a vehicle for inheritance tax planning.’ 

Pensions review on the horizon 

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

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

In July, Reeves promised a ‘landmark pensions review’ to ‘boost growth and make every part of Britain better off.’ 

It’s not clear if this review will lead to further discussions or consultations about the possibility of means-tested state pensions, but at present this seems unlikely. 

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

I have spoken to Dennis Reed, a director at the non-profit organisation for older people, Silver Voices, and Ed Monk, associate director for personal investing at Fidelity International, for their views on whether or not the state pension is likely to end up being means-tested and how this could work in your case. 

Government ‘wants to know pensioners’ incomes’

Dennis Reed of Silver Voices says he is concerned than means-testing of pensions may be on the horizon long-term

Dennis Reed, a director at Silver Voices, said: Silver Voices is very concerned over speculation that future means-testing of state pensions is being considered by the Government. 

Our suspicions have been strengthened by reports that the forthcoming Fraud, Error and Debt Bill will continue with the Tory plans to provide sweeping powers for DWP investigators to require banks to provide information on the financial circumstances of all 12million state pensioners. 

As the state pension is a universal payment, irrespective of income, fraud in terms of income declarations is irrelevant, unless there are plans afoot to means-test the state pension under Labour. 

Early targeting of pensioners to make savings by scrapping the winter fuel payment for the large majority does not bode well for the preservation of existing rights of older people under this Government. 

Ed Monk, associate director for personal investing at Fidelity International, said: At age 49 now you are in line to get your state pension in 18 years’ time when you reach 67.

Whatever rumours might be swirling about possible changes to the state pension, it still makes sense to ensure you get the maximum possible when you reach that point. 

That means completing 35 years of national insurance contributions. These can include years spent on caring duties or in receipt of employment benefits as well as those spent in employment. If you’re missing years, do what you can to make extra contributions to make them up.

The full state pension is a very valuable benefit because it is income which is both guaranteed and uprated every year. These things are very expensive to replicate in other ways. 

Ed Monk, of Fidelity International, thinks the introduction of means-tested state pensions looks ‘very unlikely’ 

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 it very expensive for the Government to provide, 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 to provide and some think that it may soon become unsustainable. 

Thanks to the triple lock, pensioners have seen their payment jump from just £185.15 in 2022/23 to £221.20 this year – a rise of almost than 20 per cent in two years. That’s very expensive for a Government which is short of money.

Perhaps that’s why reforms to the state pension are coming back on the agenda, even if significant changes would be politically very difficult to do. 

The election this year saw both major parties promise to keep the triple lock. The Conservatives even promised to add another protection to ensure the normal full state pension would remain completely tax-free. That shows you how reluctant politicians are to make the state pension less generous.

Means-testing it would be just about the most radical reform the Government could make. 

It would completely upend the plans of individuals who have organised their finances around receiving the payment when they retire. 

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

Remember that many of those who would presumably be denied a state pension on the ground of their wealth have already had their ability to save tax-efficiently in pensions severely reduced or removed altogether via the tapered annual allowance. 

It’s very hard to see how a means test for the state pension could be introduced without less drastic changes – such as scrapping the triple lock or reducing the cost of pensions tax relief – happening first.

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