State pension warning as changes to system could see payments 'means-tested at punitive level' to save Treasury money

The Government has already changed the criteria for Winter Fuel Payments, causing around 10 million pensioners to miss out on the £300 payment this year. And there has since been speculation that they could target the state pension next and make it a means-tested system in the future.

During their campaign, the Labour Party promised not to increase taxes for “working people”. However, with the £22billion “black hole” in public finances to plug, experts have warned pensioners may be targeted as the state pension costs the Treasury over £100billion annually – a figure expected to keep on rising.

Before the election, Rachel Reeves insisted that Labour had “no plans” to bring in means-testing for the state pension.

But Sir Edward Troup, a senior advisor has said the Government should consider reducing the entitlement in order to save money.

Tom McPhail, of consultancy The Lang Cat warned the change would have to be done at “a punitive level” to make a dent in the “black hole” and to save the Treasury money.

Figures show that state pension makes up 71 per cent of income for the poorest fifth of households with someone aged 66 to 70 – but it still makes up 23 per cent for the richest fifth, according to the Institute of Fiscal Studies.

Although means-testing could raise funds for the Treasury, there are not many wealthy pensioners to tax, which will not make a huge difference, McPhail explained.

Australia has taken on this means-testing model and given a lower state pension to wealthier retirees.

For example, a home-owning couple with net assets – including property – in excess of A$419,000 (£228,000) see their “old age pension” (OAP) gradually reduced, and if net assets exceed A$954,000 they get nothing.

For millions of people in the UK, the state pension is the bedrock of their retirement plan and will make up the majority of the income they plan to receive.

New research has found that unless savers have over £250,000 in their private pensions, the state pension will make up the majority of their retirement income.

Steven Cameron, pensions director at Aegon explained that while the full new state pension’s £221.30 a week won’t provide a life of luxury, to buy a lifetime guaranteed income to match this from state pension age (66) would cost a staggering £250,000.

He said: “It's not surprising that people are very reliant on the state pension to support their retirement living standards. Our own Second 50 research has shown for two years running that over 95 per cent of people expect to rely on it, to varying degrees.

“This was before an estimated 10 million people lost their winter fuel allowance, and for many of them, every penny of their state pension really matters.

“The fact is that the state pension is worth a huge amount of money, and any suggestion that it might be ‘means-tested’, so reduced or even removed for those with other retirement income above a given level, would send shockwaves through the pensioner community, impacting hugely on living standards for all but the truly wealthiest of wealthy.”

One way pensioners could secure a guaranteed income is to buy an annuity.

Based on current annuity rates, a couple would need half a million pounds to ‘buy’ their state pension privately and avoid uncertainty when it comes to their state pension.

Cameron said: “While this looks huge, the £500,000 is based on terms available today which are much better than they were a few years ago as annuities cost less when interest rates are high.

“With expectations that interest rates are likely to fall back to lower levels in the coming years, the cost will likely rise, making the state pension even more valuable.

“While many individuals now leave their pension pot invested and draw down an income, you’d still need a similar sum to be able to draw an amount equal to the state pension without taking too much risk that your money might run out before you do.”