Articles - Means testing the State Pension

By Jack Carmichael, Associate and Senior Consulting and Longevity Actuary and James Jones-Tinsley, Self-Invested Pensions Technical Specialist, Barnett Waddingham

While not specifically mentioned in the 2025 Pensions Commission announcements, means testing of the State Pension is likely to be one of the areas the Commission considers.

Reasons for introducing means testing: building a “fairer” system

Longevity risk is a topic I always find interesting, and the State Pension is arguably one of the largest fixed-income retirement arrangements in the world.

Analysis from the Institute for Fiscal Studies shows that, for the lowest fifth of pensioners, the State Pension makes up around 70% of total retirement income. These pensioners are therefore only slightly above Pensions UK’s minimum retirement standard of £13,400 a year. Many are likely to fall below that level if they rely solely on the State Pension. 

By contrast, for the top fifth of earners, the State Pension accounts for around 20% of total retirement income. 

Redistributing State Pension support from the highest to the lowest earners could therefore improve retirement outcomes for millions of lower-income pensioners.

My own analysis  suggests that, if life expectancy rises by more than expected, the State Pension Age could, in an extreme scenario, need to increase to 80.

Means testing would therefore give the government another lever to help manage the cost of the State Pension. 

One possibility is to view it as a form of longevity risk insurance, rather than as a uniform level of income.

The state is well placed to help manage longevity risk across the population. It could help pensioners manage the long-term risk of running out of money if they live longer than expected.

The system could include means-tested, age-based increases that activate for older pensioners.

Such a system might help encourage individuals to save more for retirement. It could also create greater scope for retirement products that pay more at younger ages, when pensioners are in the spending phase of retirement.

Reasons against introducing means testing

Jack raises some interesting points, particularly from an actuarial perspective on the State Pension system as a whole. I want to look at some of the reasons why means testing may not be the right approach, drawing on my background in individual retirement planning and focusing on how it could affect retirement outcomes. 

The UK is already facing a significant retirement savings challenge, with many people either under-saving or not saving at all. Analysis from the Department for Work and Pensions suggests that:

Only 25% of individuals earning less than £10,000 per year are saving into a pension.75% of individuals earning between £10,000 and £20,000 a year are, at most, saving at the minimum auto-enrolment contributions level of 8% of salary.

Retaining a uniform State Pension reduces the risk of lower-income savers being discouraged from saving into a pension. 

Analysis from the Institute for Fiscal Studies suggesting that, since 2011, the triple lock has added £11bn a year to the cost of the State Pension.Analysis from the Office for Budget Responsibility suggesting that the triple lock could add £43bn a year to the cost of the State Pension in the early 2070s.

These are significant costs for taxpayers. A fair question is whether some of that spending could instead be used to increase the base level of State Pension income. 

Several suggestions have been made about how the triple lock could change. However, any reform would be politically controversial, and the main political parties have tended to treat the triple lock as close to untouchable.

There is also a risk that added complexity could discourage people from claiming other means-tested benefits. In the UK, it is estimated that around 38% of eligible pensioners do not claim Pension Credit, possibly because of the complexity involved in claiming it.

Public and political opposition to something as fundamental as means testing would be substantial. It would take a very bold politician to propose a policy that may deliver no savings for five to ten years, yet prove immediately unpopular with the electorate.

So, should the State Pension be means tested?

As Jack and James have highlighted, any move towards means testing would have implications well beyond the State Pension itself, touching everything from retirement saving behaviour to perceptions of entitlement and fairness in society.

Trade-offs are unavoidable, and the 'right' answer depends on priorities as much as economics. The complexity of the issue, combined with the public sensitivity around pensions, makes this one of the most politically difficult debates in UK retirement policy.