Is Labour going to test the state pensions? How would that work?

In 2020, just before the pandemic, I decided to take early retirement.

I will be 66 in August and will receive my state pension from the beginning of September.

I have paid contributions to the NI for 46 years and am looking forward to receiving my full state pension. I feel I have contributed more than adequately to it over the years.

I have read that the new government is considering introducing an income test for the AOW.

I am curious to hear your opinion on this, what they might consider an income-related test and what implications that would have for the state pension.

Tanya Jefferies from This is Money responds: You are not the only reader who wrote to us about this after the election.

The Labour Party has said nothing to justify your suspicions, but a major pensions investigation is underway and a change of government will undoubtedly raise concerns about the disruption of financial matters that appeared to be settled.

Since a major overhaul in 2016, you can qualify for the state pension by building up a national insurance file over 35 years. You can do this by paying contributions through your employment or by earning annual credits for extenuating circumstances such as caring responsibilities, illness or unemployment.

Old rules arising from the now-abolished system of ‘contracting out’ of the Second State Pension (also known as SERPS) mean that some people with more than 35 qualifying years are still getting less than the full new State Pension, which is now £11,500 a year.

Some people who have taken out a contract and reached retirement age before April 2016 will also receive less, while people who have taken out a contract can receive more.

You do not say whether you are affected by the outsourcing, but you or someone who wants to can check this for themselves. state pension forecast and their National insurance record on gov.uk.

People who can afford it can voluntarily buy a top-up to their state pension if they do not have enough years of retirement yet, or they can defer their state pension to improve their payments.

Will Labour take a different view of the current system and take the downright radical step of cutting state pensions for the better off?

We asked a financial industry executive who has experience of both our own state pension and the Australian version where it is means-tested to answer your question.

Mike Ambery, director of pension savings at Standard Life, answers: Unlike most government benefits, the State Pension is not dependent on your income.

Eligibility is determined by a person’s Social Security information. Whether a person receives the full amount depends on the payments or reductions he or she has made.

This approach is such an integral part of our pension system that it is rarely considered. However, there are a number of factors that are creating pressure for reform, or at the very least for a discussion to take place about the current approach.

The main drivers for change are our ageing society and the ‘triple lock guarantee’.

The triple lock in particular is in the spotlight.

It has been one of the most important parts of pensions policy since it was introduced in 2010, as it ensures that the state pension keeps pace with the cost of living and has proven to be hugely beneficial to pensioners in recent years when inflation has been high.

While valuable, it is also expensive to maintain and there has been much speculation about its long-term affordability.

The new government will face these challenges, but we know from the campaign that Labour is committed to the ‘triple lock’, so the chances of change are slim.

However, it is possible that the government will also look at other aspects of state pensions as part of a promised pension reform to improve their affordability.

In other countries, a means test is used to determine eligibility.

In Australia, for example, the level of the State Pension (Age Pension in Australia) is means-tested. The test is based on the income received by an individual and their partner from all sources. Below certain thresholds, the State Pension is reduced based on income.

The reduction by means of a means test could effectively lead to no more AOW being paid at certain income levels or to the amount of AOW being gradually reduced (phased out) based on income.

Income should be defined and could be classified simply as money received from other pensions, rental property income, savings, shares, equity withdrawals from home ownership schemes and even gains from skill or luck.

It is unlikely that the income will be considered another state income benefit.

In order to introduce a means test, a system is needed for registering income (similar to the current tax return with the Tax Authorities). There must also be the possibility to contest the assessment if people’s income varies.

That said, it would be possible for the government to introduce a means test, but it would likely be unpopular and it could be very challenging for individuals to complete and participate in the test, as people’s physical and mental capabilities decline later in life.

A further complication is that while the income test may be relevant, expenditure must also be taken into account.

In particular, home ownership, rent, and healthcare/medical costs can have a dramatic impact on an individual’s cost of living. We already see that healthcare costs are subject to means testing.

While some people have or are on track to build up sufficient private pension savings for a comfortable retirement, there are millions of people who are or will become heavily dependent on the state pension.

This could mean that testing is a possible option, but this is unlikely to be popular.

When we looked abroad again, the proposals for a means-test were rejected in New Zealand, arguing that everyone who has made an appropriate contribution is entitled to it.

An alternative to the income-related test, which the government already uses to control costs, is to raise the minimum age.

The AOW retirement age will be gradually increased and is expected to rise to 67 years in 2028 and to 68 years in 2046.

There is a chance that this will increase further or faster depending on affordability.

However, this approach also brings challenges, as it penalises those who cannot continue to work and those in poor health, who are unlikely to live much beyond state pension age.

This shows that policymakers have no easy answers and that the government hopes to achieve its growth targets to strengthen public finances.

For people who qualify for an AOW benefit, the chance of changes is smaller.

The government wants to ensure that people have time to plan ahead. Normally, changes to state pensions are implemented over a period of many years.