All the hurdles to jump through if state pension is means tested ...Middle East

Labour has refused to rule out means-testing the triple lock following a row with Kemi Badenoch over the state pension.

Speaking on LBC Radio last week, Badenoch, the leader of the Conservative Party, said the UK had a poor record in prioritising assistance to those who need it the most.

Her comments led other parties to accuse her of wanting to water down the triple-lock uprating policy.

Under the arrangement, the state pension goes up each year by either 2.5 per cent, inflation, or earnings growth – whichever is the highest figure.

A Tory spokesperson denied this was on the cards, accusing Labour and the Liberal Democrats of misrepresenting her, but did say the party would “look at means-testing”.

Here, we take a look at how it could work in practice and the hurdles politicians and pensioners could come across.

During a phone-in on LBC Radio, Badenoch said the UK, like other Western nations faced a “structural problem” because people were living longer while having fewer children.

She added that “serious thinking” was required to address the financial impact of more Government spending “on later life”.

Asked whether this included the triple lock, she replied: “That’s exactly the sort of thing that the policy work we are going to do be doing will look at”.

But pressed on whether her party would really look at the triple lock, she then added: “No, we are going to look at means-testing.

“Means-testing is something which we don’t do properly here. Starting with the triple lock is not how to solve the problem, we need to start with why are we not making the same kind of money we used to make?”

What has Labour said on the matter?

Asked on Friday whether the state pension triple lock was unaffordable, Sir Keir Starmer’s spokesperson refused to rule out potential plans to means-test.

He said: “The Prime Minister is committed both to the triple lock and the principle of people receiving a state pension based on the contribution they have made over their lifetime, regardless of wealth.”

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In all likelihood, means testing would mean that your income would be taken into account, to some extent, when calculating your state pension.

There are two ways, broadly speaking, you could means-test the state pension, former pensions minister Sir Steve Webb told The i Paper.

He explained: “One way could be a very limited means-test, applying only to those on the very highest incomes.

“The main problem is that it would raise relatively little money whilst complicating the system considerably.

“There would also be a suspicion that a threshold which started high would gradually be extended, and this would increase the political barrier to change.”

Under current UK rules, staff earning at least £10,000 must be auto-enrolled into a company’s pension scheme if they’re aged between 22 and state pension age.

By law, their employer then has to make contributions of at least 3 per cent of their salary, with the employee adding 5 per cent.

But experts have consistently warned that this isn’t nearly enough to fund a comfortable retirement.

If the Government choose to introduce a “much more extensive means-test affecting large numbers of retirees”, this could lead to more people opting out of auto-enrolment.

Webb added: “In this case, the problem is that if lots of people knew that their state pension would be reduced if they had a private pension then they might opt out of automatic enrolment.

“In doing so, they would be throwing away their employer contribution to their pension, and we would end up with a system where far more people were largely or wholly dependent on the state in retirement.”

What do experts think?

Webb said means-testing the state pension could cause some issues.

He explained: “Even if you didn’t qualify for a full state pension at retirement because of your private savings, it would be very tempting to run down your savings as quickly as possible so as to increase your state pension.

“Although you can have rules against this sort of thing, it can be hard to police, especially if you are talking about millions of retirees.”

He said another problem that could arise could be undermining the concept of NI, adding: “NI is one of the more popular taxes, partly because people feel they are getting something back for it.

“If growing numbers of people got little or nothing in return for a lifetime of NI, it could further undermine the willingness of voters to pay in to the system.”

Jason Hollands, managing director of Evelyn Partners, said this will “likely prove to be a Westminster storm in a teacup”.

At some point, the triple lock formula for determining the scale of annual increases to the state pension will need to be reviewed, Hollands said, as it’s not sustainable over the long term, but any changes in access to a state pension would be “hugely contentious”.

He said: “Were any party to propose means-testing access to the state pension, such a move would be electoral suicide in a country with an ageing population and, were such a measure ever to be introduced – which I doubt – it would need to be phased in gradually after many, many years, so that people have the time to make alternative provision.”

However, it is thought Badenoch was referring specifically to means-testing the triple lock.

Craig Rickman, personal finance expert at interactive investor, said if introduced, he doesn’t think it would be very popular.

He said: “The public backlash could be severe. If someone’s saved diligently into private pensions throughout their working life and paid sufficient NI contributions learns they’ll receive a reduced, or even no, state pension it would be an incredibly bitter pill to swallow and may leave a gaping hole in their retirement plans.

“Means-testing the state pension is something the Government could do, but the system wouldn’t be simple and cheap to implement.

“The mechanics would be far more complex and costly to set up and monitor than the one used for assessing winter fuel allowance entitlement.”

How do other means-testing systems around the world work?

A handful of countries around the world means-test the state pension, including Australia.

While the UK’s system is based on a pensioner’s national insurance (NI) record – with 35 years of payments or credits, through claiming certain benefits, needed to get the full amount – there is no equivalent in Australia, with the pension paid out by the state being a means-tested benefit awarded subject to tests on income and assets.

The “age pension” in Australia is reduced if yearly income from other sources is over a threshold. The fortnightly thresholds are AUS$212 (£107) for a single pensioner and AUS$372 (£189) for couples.

For each dollar of income over this, the pension is reduced by 50 cents.

Around a third of Australians have their pension amount – which can total AUS $29,754.40 (£15,127) a year – reduced.

So why is it so different? Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said: “The means-tested nature of the age pension can be explained by the strength of the Australian workplace pension and superannuation system.”

A guarantee has been in place since the 90s which requires employers to contribute to their employees’ pensions.

Although the UK has a similar guarantee, this was only introduced 13 years ago via auto-enrolment, and the mandatory employer contribution rate is only 3 per cent, compared to 11.5 per cent in Australia, increasing to 12 per cent in July this year.

In the UK, people can also opt-out of their workplace contributions, but Alistair McQueen explains that a “crucial” difference is that in Australia, there is no opt-out.

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