personal finance

How to save your state pension

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The year is 2053, and a band of spry protesters wave placards outside parliament. Inside, a throng of ashen-faced MPs vote to pass new legislation. In Thockrington, Northumberland a groaning, creaking sound disturbs the local sheep. It’s William Beveridge, architect of the welfare state, turning in his grave as the state pension is scrapped for all but the poorest.

This vision may sound outlandish. Prime Minister Rishi Sunak is about as close to means testing the state pension as he is to banning sandwiches. But it resembles what many seem to expect — a third of adults think the state pension won’t exist in 30 years. No doubt these fears are fuelled by warnings about the burgeoning bill. If the triple lock proves impossible to ditch, then perhaps mutterings about means testing will make it closer to the political mainstream. If they do, here is how to fight back.

Know thine enemy. They will come armed with good arguments, first pointing out the inadequacy of the current system. The state pension of around £10,600 a year is hardly generous. Even including private saving, the government predicts that around half of singletons retiring in the 2060s will live on less than £23,000 a year. Meanwhile, the cost of that meagre provision is set to grow, as pensioners multiply from 24 per cent of the adult population now to around 27 per cent by 2050. Not unreasonably, means-testing proponents will say that when money is tight, it should go to those who need it most.

As a demonstration that this can be done, advocates will point to Australia. Retirees there submit to an income test and an assets test if they want a publicly funded pension. One in three over-70s either don’t pass or don’t bother. Of those who do, a third are too rich to get the maximum payment. George Kudrna, an economist at the University of New South Wales, argues that the scheme allows for lower taxes, which sharpen incentives to work. And he says the benefits of that more than cancel out any costs because of weaker incentives to save.

Having sussed out the opposition, start by appealing to big, sweeping arguments. The social contract is stronger when everyone both gives and gets, for example. And the process of separating out the truly needy and the undeserving is ugly and intrusive. (Beveridge loathed means testing as it penalised people who dutifully saved.) Us millennials already face more uncertainty than our boomer parents as, unlike them, we can’t get defined benefit pensions. Please don’t whip away the only solid bit left.

If that doesn’t work, turn to threats. So you want me to save more and spend less on avocados? Sorry, a wizened Martin Lewis says it wouldn’t be worth it. Admittedly, there isn’t much good evidence of people intentionally saving less to meet means tests — partly because it is hard to measure. If your opponents works this out, switch tactics. Point out the unfairness of those who scrimped and saved ending up with the same amount as those who blew their budget on kombucha.

A tough means test like that for Britain’s pension credit, which tops up income for the very poorest, would save bucketloads of cash. But in 2021 the average pensioner couple got around half of their gross income from the state. So a new system that wanted to avoid thumping millions of people of modest means would have to give the vast majority of pensioners something at least — and have them all process mountains of annoying paperwork.

In Australia, James Coyle of Retirement Essentials, an advice company, sees people getting stuck as they wade through the 120 or so questions about their income and assets. Well-off families who can easily afford to get help with the form filling aren’t eligible anyway.

Experience suggests that sailing through seamless bureaucracy is not Britain’s strength. In 2021, 38 per cent of eligible households did not claim the pension credit. The Department of Work and Pensions was recently found to have muddled up payments to around 130,000 pensioners. Significantly increasing the complexity of their caseload would be brave.

Finally, any transition would be a nightmare. (Australia had means testing from the start.) You would struggle to yank the state pension from current retirees who are unable to adjust. Phasing it in gradually, perhaps only for people starting work now, would be complicated. And Steve Webb, a former pensions minister and partner at actuarial consultancy LCP, points out, “politically that’s utterly undeliverable because you get no money and all the grief”.


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