The new state pension is paid to those who paid enough national insurance, regardless of whether they have any other retirement income. The amount you get is guaranteed to go up in line with the highest of inflation, wages or 2.5 per cent thanks to the triple lock — a guarantee that the Office for Budget Responsibility says will cost the government £15.5 billion a year by 2029. We ask if payments should be limited to those who need them.
Means-testing the state pension is often floated as a potential way to rein in public spending. The logic seems straightforward: why should state support go to already wealthy pensioners?
However, the state pension is an important source of retirement income even for relatively well-off pensioners. It makes up 23 per cent of the income of the top 20 per cent of the highest earners among the recently retired, according to our research in 2023. You’d have to be really very well-off not to miss the £230.25 a week that the full state pension is now worth.
Second, means-testing disincentivises saving. If your level of state pension depended on how much you had in your private pension, then each pound saved would deliver a smaller net return. This would discourage people from saving more and could deter participation in workplace pensions altogether.
Making decisions about private pension savings is already complex, and means-testing the state pension would make it even more difficult. You would have to consider the effect that additional savings would have on your future state pension income.
• Fixing the retirement crisis means tackling public sector pensions
Automatic enrolment into workplace pensions would also be harder to justify if the state pension was means-tested, as some might see no benefit from saving in a private pension.
Proponents of means-testing often point to Australia as an example of where it works. However, Australia’s means-testing of the public pension is balanced by compulsory (and high) private pension contributions during working life, meaning that most retire with substantial private pensions.
In the UK, where we rely on a voluntary, but strongly encouraged, private pension system, it would not work as effectively.
The state pension, as it stands, provides a solid foundation for retirement incomes for most people. When considering how to control the rising costs of the system, the government should instead focus on setting the state pension age and when and how to move on from the generous triple lock increases.
• Read more money advice and tips on investing from our experts
Yes
Edmund Greaves, editor of the Mouthy Money podcast and former deputy editor of Moneywise magazine
The state pension is unsustainable in its current form. It is the single largest cost in the Department for Work and Pensions budget, accounting for 46 per cent of all benefits spending, according to the National Audit Office.
Government forecasts put the bill at £168.7 billion for the 2029-30 tax year, which represents a 141.5 per cent rise since 2010-11 or more than 7 per cent annually.
When the triple lock was introduced in April 2011, it rightly sought to address the pension’s modest size relative to other minimum income benchmarks, such as the national living wage.
But unlike every other benefit, the state pension is not means-tested. It is based solely on national insurance contributions, regardless of overall wealth. Millions of people in retirement now get payments they simply do not need. According to the Office for National Statistics, the median net wealth of households with a head aged 65 to 74 between April 2020 and March 2022 was £502,500.
These people can fund their retirement without taxpayer help.
Past governments have tweaked the system by raising the pension age and making it the same for men and women, but they have avoided the central question of why the wealthier should be paid the same as those who rely on the pension to survive.
Next year marks an inflection point because the full state pension will, for the first time, exceed the income tax personal allowance — the amount of income you can have tax-free. This means that some of the state pension could be taxable and those pensioners without tax-sheltering options for any additional retirement income will pay tax on it while others will be able to rearrange their finances to avoid this. It is an indefensible imbalance.
Instead of endless debates over the triple lock or incremental increases in the pension age, we should start means testing. A fair approach would be to assess net worth at state pension age and direct support to those who truly need it. Relying on the tax system to claw back payments from the rich will never deliver enough savings.
The state pension is a cornerstone of the UK’s social contract. If the state continues to distribute it indiscriminately, funded by working-age taxpayers, that contract will erode.
Those who have, laudably, built enough wealth to fund their retirement should not get state support they do not need. Means testing would protect the poorest, reduce unfairness, and put the pension budget on a sustainable footing for the future.