Long-term Labour backers have suggested the new government will need to consider means-testing for the State Pension.
Just as the Chancellor is removing the Winter Fuel Payment as a universal benefit for all pensioners, she is now being encouraged to look at changes to the State Pension itself.
Some think-tank experts suggest Britain could follow Australia where a means-testing regime means the wealthiest retirees get no state pension at all.
An increasing number of pensioners are already losing a chunk of their retirement income, including the State Pension, due to the fact that they are paying tax on it.
Thousands more are in line to follow suit given the decision to freeze the personal allowance that people can receive before paying tax at the 2021 figure of £12,570 through to 2027-28.
Now it is being suggested that one of the most radical reforms Labour could consider is to “means-test” the state pension, so that wealthier retirees receive less of it, or get nothing at all.
Currently, everyone aged 66 and over is entitled to payments of £11,502 a year if they have paid National Insurance for 35 years. And the figure is set to rise to around £12,000 in April next year.
The Telegraph is reporting that Sir Edward Troup, one of four tax advisers appointed by Rachel Reeves, suggested last month that the state pension should be means-tested.
He told LBC: “If the public finances are in a bit of a state, perhaps wealthy pensioners should be giving up their full state pension.”
Sir Edward admitted that means-testing pensioners would be hugely controversial but said a “debate needs to be had” and means-testing “should be delivered”.
David Blanchflower, a former Bank of England economist who sat on the Monetary Policy Committee, said in March that a future government would probably need to consider means-testing the state pension.
Mr Blanchflower, who has been very critical of the new Labour government for failing to be bold enough, added: “An incoming government is going to have to means-test stuff. They are going to have to raise the basic pension a lot for the poor, and probably means-test it.
“It isn’t that pensions are too low, it is that they are too low if that is the only income you have.”
The Social Market Foundation think tank has called for a Royal Commission to conduct a review of the state pension’s future financial sustainability – and assess the viability of means-testing.
In a paper written for the Foundation, Michael Johnson, pointed out that Australia “aggressively” means-tests its “Old Age Pension” (OAP) above “fairly modest asset and income thresholds”.
In Australia, a home-owning couple with net assets (including property) in excess of A$419,000 (£228,000) see their state pension gradually reduced. If net assets exceed A$954,000 (£519,000) they get nothing.
Tom McPhail, of consultancy The Lang Cat, believes that means-testing would only bring in significant cost savings in the UK if it were expanded to cover pensioners who are not especially wealthy.
He said: “Means-testing would be bureaucratic and expensive to administer. And unless you do it at a punitive level, you don’t save the Treasury a lot of money.
“If you genuinely only target wealthy pensioners, the problem is there aren’t that many of them.”
Before the election, Rachel Reeves insisted that Labour had “no plans” to bring in means-testing for the state pension.
Former Lib-Dem pensions minister, Sir Steve Webb, said there is unlikely to be any means testing of the state pension in the short term given the likely backlash. However, he suggested it could be coming down the track.
He warned: “Means-testing is very much the nuclear option. The state pension is seen as something people have earned – an entitlement that you’ve paid into all your life.
“The suggestion that you might lose some of it would be very badly received. It would affect today’s pensioners and millions approaching retirement who would have to rewrite retirement plans.
“But it could be a long-term direction of travel that would impact future pensioners.”
The cost of the state pension stood at £124bn in 2023 to 2024, according to Office for Budget Responsibility (OBR) estimates. But this cost is forecast to rise to £158bn in 2028 to 2029.
An ageing population in increasingly poor health is expected to exacerbate the problem, with a wave of retiring Baby Boomers – born between 1946 and 1964 – expected to push up the pensions bill significantly this decade.
Means-testing is often framed as an alternative to repeatedly increasing the age at which people can claim the state pension. The state pension age is already set to increase from 66 to 67 in 2028 and then to 68 between 2044 and 2046.
According to the International Longevity Centre think tank, the state pension age would need to rise to 70 by 2040 to maintain the current ratio of workers per retiree.
Research by the Institute for Fiscal Studies suggests that increasing the state pension age by one year in the late 2030s would save the Government by between £8bn and £9bn a year in today’s money.
