I’m worried about income-related pensions coming in before I retire – how likely is that? STEVE WEBB replies

I’ll be 63 in a few days and then retire at 67.

I have been a single parent for many years and could not afford to build up a pension, mainly because I started working later in life and the cost of living is now high.

I have no savings and live from month to month.

However, I expect to have paid off the mortgage on a modest home within a few years.

I’m moving to an apartment and for the first time I have some savings in the bank.

Since I may only be two years away from receiving my state pension,

I fear that those in power will say that I am not entitled to my state pension because I have over £50,000 in the bank.

How likely is it that this means testing will be introduced before I retire in four years?

And if so, do I have to spend my money before I am forced to live on it? I have paid NI contributions for 40 years.

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Steve Webb responds: Earlier this year I responded to another reader who was concerned about the risk that the AOW would become dependent on income.

In that column I discussed a number of other ways in which a government could control spending on state pensions, short of relying on means testing.

But since then there has been a change of government and some senior Labour advisers have talked about a means test, so I thought it was worth returning to the subject and asking how likely this is.

In recent months, several influential figures have floated the idea of ​​means-testing state pensions. For example:

Former HMRC director Sir Edward Troup, who has advised the new Chancellor of the Exchequer on tax policy, told LBC radio: ‘…if the public finances are in a bit of a bad state, wealthy pensioners might have to give up their entire state pension.’

David Blanchflower, a former member of the Bank of England’s monetary policy committee, said earlier this year: ‘A new government will have to do a means test.

‘They will have to significantly increase the basic pension for the poor, and they will probably have to make this an income-related arrangement.’

The finance minister warned of more “difficult decisions” in the October budget, while the prime minister said the situation would get “worse” before it got better, suggesting policies once considered politically “unthinkable” are now at least on the table.

What this could mean in practice is that this government – ​​or a future government – ​​could simply decide that people with a good company pension would get a reduced state pension. They could also decide that people with relatively large assets (such as investments, second homes etc.) would get a reduced benefit rate.

There is a precedent for this in the Australian pension system, which has been highly praised by British pensions ministers, where the ‘age pension’ is subject to both an income and an assets test.

In short, in Australia you are allowed to have a certain amount of private income on top of your age pension, but if you earn more than the limit, you lose 50 cents of age pension for every dollar above the limit.

You can have a certain amount of savings, known as the ‘asset free zone’, but above that your pension will be reduced by $3 a fortnight for every $1,000 in assets.

As a result of this combined income and assets test, it is estimated that only two in five Australians will receive the full amount, around a quarter will receive a reduced amount and the rest of the pensioners will receive nothing at all or will not claim the entitlement.

Interestingly, this research predicts that the percentage of Australians receiving a full age pension will fall sharply over the next decade.

It is only fair to say that the UK government would introduce something called a ‘nuclear option’ and that it would make the winter fuel payment row a piece of cake.

Many people who have already retired would feel very hurt if they had carefully planned their plans and perhaps sacrificed their income while working to save for a better retirement, only to find out that the ‘rules of the game’ had changed when it was too late to do anything about it.

That is why I consider it highly unlikely that any move towards a means test would also apply to people who are already retired.

However, a similar argument would apply to those – like you – who are approaching retirement and have also made plans that are very difficult to change. So some form of transitional protection might be necessary in this case too.

Regarding your specific question, if you knew you were going to be income tested, it would be very tempting to start using up your savings before you retire to ensure you qualify for the full amount.

But the government is likely to be aware of this risk and already has the means to punish anyone who has ‘robbed’ themselves of capital to get more benefits (or pensions in this case).

But, crucially, if the government acknowledges that it needs to exempt those who are retired or nearing retirement, it means that they will get no money from the policy at all for years. Yet they would get all the political pain on day one.

In general, politicians prefer policies that generate a lot of money early on and as little hassle as possible, while this is exactly the opposite: years of no money and enormous opposition.

Given the hostility that arose over the abolition of winter fuel payments, it seems to me extremely unlikely that the Minister of Finance will now make an additional effort by attacking state pensions themselves.

Of course, this does not mean that pensioners no longer have to take the heavy medication we have been promised.

Wealthier pensioners might well expect a stricter regime for things like capital gains tax and/or inheritance tax. But my judgment is that plundering the state pension would be seen as a step too far.