Will the State Pension be means-tested?
The State Pension costs the British government a huge amount of money. In 2022-2023 alone, it cost £110.5bn. This is expected to grow to £124bn in 2023-24 as the “triple lock” system raises the State Pension by at least 2.5% each financial year.
To put this into perspective, the UK government spent almost £1,200 billion in 2022-23. As such, the State Pension comprised nearly 10% of all public spending. Naturally, many are asking whether this is sustainable in the long run.
Below, our Grantham financial advisers discuss the possible future of the UK State Pension and the possible implications for household financial planning.
The State Pension: a brief history
The State Pension was introduced in January 1909 following the passage of the Old Age Pensions Act. The most an individual could receive was 5 shillings.
Applicants needed to be at least 70 years old to qualify for the State Pension. Moreover, the original State Pension was means-tested. If you had been to prison in any of the previous 10 years, you might not get anything. You also needed to earn under 12 shillings per week (about £70 today).
The government could also refuse you if you were deemed of “bad character”, such as getting habitually drunk or if you did not work when able to do so.
Over the next 50 years, the State Pension changed. In 1928, the pension age was lowered to 65 and targeted at all workers. Events culminated in 1948 under the Beverage government when the NHS and modern State Pension system were created.
At that time, average life expectancy was around 68. As such, while the State Pension had suddenly become widely available, the government did not expect to pay it to most recipients for a very long time.
By contrast, UK life expectancy today is around 82, with nearly 15,000 centenarians each year. This has contributed to considerable strain on the State Pension system, raising questions over whether it can be sustained in its current form.
Possible solutions
The UK State Pension is not widely regarded as a means-tested system. Anyone can receive it provided they have at least 10 years on their National Insurance (NI) record.
Regardless of other income, an individual can receive the full new State Pension of £221.20 a week (£11,502.40 per year) if they have 35 qualifying years on their NI record.
Moreover, the State Pension rises each year to help preserve its spending power for recipients as the cost of living goes up. This is called the “triple lock”, and it is the primary reason for the rising public spending on the state pension each year.
Some have argued for means-testing the State Pension to make it more sustainable – i.e. treat it like many other UK benefits by only giving it to those who truly need it.
Indeed, many developed nations already use such a system to save public money. Australia, for example, only spends 5.29% of its GDP on its state pension – the 10th lowest in the OECD (Organisation for Economic Cooperation and Development).
However, there is always a trade-off, whatever the pension system. To take Australia again, the pensioner poverty rate is much higher than in other nations (e.g. Sweden and Norway).
One of the key issues of means-testing the UK State Pension is whether people should be “punished” for saving “too much” towards retirement. This is highlighted by the Institute for Fiscal Studies (IFS), which commends “simpler” systems such as basic public pension schemes like the one used in Denmark.
The IFS solution could offer an innovative way forward. They suggest a new “four-point pension guarantee” to improve the current system (rather than introduce wholesale change). The system could possibly save public money whilst preserving much of the strengths of the current State Pension – e.g. its universality.
Whether a UK government will have the willingness and political capital to implement such changes remains to be seen. Labour and the Conservatives – the historic beneficiaries of the two-party system – have interests to preserve the system in its overall form.
Invitation
Despite questions over its future, the State Pension is still an invaluable “pillar” within a wider retirement strategy for most clients in Grantham and further afield.
It provides immense stability and predictability with its indefinite income (backed by the UK taxpayer) and triple lock guarantees. Whilst it is unlikely to provide for a “comfortable retirement” on its own, the State Pension is a valuable source of income diversification in later life.
Questions about the State Pension’s future serve as valuable reminders of the importance of building a holistic financial plan. With the help of a financial adviser, you can ensure a high degree of in-built flexibility and adaptability to help shield your finances if laws, policies and regulations change in the future.
If you’d like to make sure you’re taking the right steps to safeguard your financial future, please get in touch.
