Now that the General Election dust has settled, the new Government has jumped into action and is rapidly making changes. At the same time, news agencies in particular are busy coming up with stories of things that the Government will do, which at the moment may be ideas, discussion points or simply fabricated for outrage. The question of whether or not the State Pension will be means tested probably falls into all three of those camps.
State Pension has become a very emotive topic and one which is also poorly understood and subject to any amount of myths (such as “the lowest in the developed world” type myth). The idea that there is something there that is “mine” because “I paid into it”, that should not be taxed because “I’ve paid tax all my life” and that was a “contract when I started work” is a very emotionally charged idea and makes changing the State Pension potentially dangerous for any party. So could we see it being means tested?
Let’s begin with the facts: the Basic State Pension is a taxable, contribution-based, State Benefit. You can argue about the exact beginnings of the State Pension in the UK but the birth of the modern State Pension as part of the welfare system in 1946-1948 is as good a place as any to start. Despite the outrage, it is a State Benefit, entitlement to which is based on payment of National Insurance contributions or NI credits that you can get for various reasons, such as not working whilst bringing up children. It has been through various changes but the principle of a universal benefit for those who reach a particular age remains true.
As with any State Benefit however, the terms under which benefits are paid and the level of benefits paid can be changed by the Government of the day, balancing their view of fairness in society with the cost of providing benefits amidst the overall costs of running the country. This includes means testing where the Government deems individuals or families wealthy enough to have no need of a benefit. Child Benefit is a good example of this.
So politically means testing could be done; the skill being in setting the point at which means testing applies at a level that would be acceptable to the vast majority of the electorate. However, only c4% of estates pay Inheritance Tax and yet it is one of the most hated taxes, so there is no guarantee that setting a level at which most will be unaffected would make it acceptable to the majority. It’s definitely not an easy decision to take.
If we set politics to one side though, the other question is how feasible would it be to do it?
Child Benefit is a relatively straight forward benefit to means test because the vast majority of recipients will be of working age and checking entitlement by using information readily available to HMRC would miss few that should be affected by policy.
Using a straightforward income measure to means test State Pension however, and depending on having the information to police it, is nowhere near as simple if you want to reduce or remove the benefit from higher earners. If someone has been regularly using their ISA allowance for example, by pension age they could have a significant amount of investment in ISAs where the income generated is tax free and so not reported on tax returns. Similarly Investment Bonds where a tax deferred withdrawal can be taken for many years means that none of this “income” gets reported until much later.
There is also the question of how you address those who are asset rich but income poor in retirement. If one person has taxable income of £30,000 a year from the NHS pension scheme and a £300,000 house, whilst another person has taxable income of £15,000 a year, draws £15,000 capital each year from their investments and two houses worth a combined £2,000,000, will the simple income assessment be sufficient to be “fair”? Would you need to have an assumed income return from assets, other than your own home, and therefore also rules about those who then give assets away?
With the increase in the use of flexible drawdown options with pensions rather than purchase of annuities, you would also need to consider whether you took into account just the income being drawn each year, and this could vary significantly year on year, or whether you took the value of the pension and an assumed income that could reasonably be drawn. It might even mean a return to the days when a minimum annual income had to be taken.
My question for anyone claiming that the State Pension will be means tested is therefore not so much a political one as a functional one – ok, show me how you would do it then without costing more in new systems and staffing than you saved in benefit reduction?
In the meantime, check your NI record and any gaps, check your State Pension projection and if you are on track for the maximum, and don’t spend too much time worrying about something that will end up on the “too difficult” pile.
