How Labour's winter fuel fiasco paves the way for means-testing the state pension

Telegraph

a day ago

As Rachel Reeves announced an about-turn on her winter fuel policy this week, she opened a whole new can of worms for pensioners.
The Chancellor's decision to return the payments to those with an income of under £35,000 has created a complicated means-test and reignited calls from some commentators to claw back other benefits, such as the state pension, from those deemed 'wealthy'.
Means-testing the state pension system would be a radical move that no British chancellor has dared attempt before. But Labour is desperate for cash and has shown it is not afraid to anger older voters.
Could Ms Reeves possibly get away with it?
Introduced in 1909 and originally worth five shillings a week, the state pension is a cornerstone of the welfare state. Today, workers pay National Insurance contributions for 35 years to receive its full benefit.
The full new state pension is £230.25 a week, while the old 'basic' pension – for those who reached state pension age before April 2016 – is £176.45 a week.
However, the benefit has become increasingly unaffordable to administer. The Office for Budget Responsibility (OBR) predicts the country's spending on pensioners will reach £180bn by 2029.
The idea of reserving the payment for those who need it most has therefore become increasingly attractive. Both Labour and the Tories pledged to keep the 'triple lock' that means pensions are increased each April by the highest of wage growth, inflation or 2.5pc. Means-testing could be one way to dramatically cut costs, without breaking that pledge.
In January, Kemi Badenoch, the Conservative leader, caused uproar when she said her party would 'look at means-testing' the state pension. Key Labour advisers, think tanks and academics have also voiced support for the plan.
Means-testing would completely upend the system. But this week's winter fuel policy reversal could make it slightly easier.
Under the latest changes, all pensioners will receive the winter fuel payment, worth up to £300 a year. However, those who earn more than £35,000 will be expected to return it to HM Revenue and Customs (HMRC).
To administer the new system, the Department for Work and Pensions (DWP) will tell HMRC who they've paid the winter fuel payment to. HMRC will then apply the income test to determine who will need to repay the money.
Government departments have long shared data about taxpayers, including doing so specifically to pay or not pay a pensioner benefit, such as free TV licences.
But is this Whitehall bureaucracy really a slow slide towards a means-tested state pension? Telegraph Money reader Jim Humphrey fears so.
The 69-year-old, a part-time financial adviser from St Albans, is one of the estimated two million pensioners who will still not receive the winter fuel payment. This is because his income exceeds the £35,000 threshold.
He is worried Labour is on a 'slippery slope' to means-testing the state pension. He said: 'I don't need the money, but it is a question of principle... I have paid tax for many, many years.'
Other state benefits have been means-tested in recent years.
Free TV licences for all over-75s were scrapped in August 2020 and restricted to those who qualify for pension credit. Last year's restriction of the winter fuel payment to those on pension credit was also a form of means-testing – as is the payment of pension credit to those on the lowest incomes.
Campaigners and economists have also pushed for free prescriptions for the over-60s to be similarly restricted.
Last October, Dr Kristian Niemietz, of the Institute for Economic Affairs think tank, said: 'Means-testing old-age benefits is a way to make fiscal savings while insulating the poorest from cuts.'
Labour is also gearing up to ban over-60s from taking student loans from 2027, as it introduces a 'Lifetime Learning Entitlement'.
Ben Ramanauskas, of think tank Policy Exchange, said: 'The Government's approach to cutting spending through means-testing is the right one.
'However, this alone will not significantly lower the cost of the UK's unsustainable welfare bill, improve public finances, or give younger taxpayers a fair deal.'
Other countries already operate means-testing on their state pension payouts. In Canada, which operates a flat-rate benefit system, a maximum of $1,433 (£773.30) is paid each month, and is topped up for those on low incomes.
In Chile, a pension is paid to those over 65, unless your family's wealth is deemed to be in the top 10pc of the population. Those with an income of less than $1,210,828 (£955.30) a month are eligible, whether they are still working or not.
In Australia, the state pension – or 'age pension' – has no reference to how long a person has worked. Instead, it is granted as an age-based means-tested benefit. About a third of pensioners have their pension cut because they have other sources of income.
Moving to an Australian-style system would be highly controversial, angering those who say if you have 'paid in' you should get the full amount irrespective of your income.
Mike Ambery, of pension provider Standard Life, said: 'There would need to be a change in applying for state pension as well as the detail to replicate means-testing in other countries. The practicality and change to a universal system now would be operationally significant.'
There would be other barriers to overcome. The Government could only make significant savings if people are able to generate big enough private pension savings. But despite the 'automatic enrolment' reforms that made workplace pensions compulsory, millions of people are on course for meagre retirement incomes.
Research by the Pensions and Lifetime Savings Association (PLSA) found that the cost of all but the most basic retirement has increased over the past year.
Two retirees running one small car, eating out weekly and taking a four-star foreign holiday each year would now need an income of almost £35,000 each before tax to retire comfortably, rising to £52,000 if they live alone.
Meanwhile, anyone living alone on the state pension would even fall short of a basic retirement, which now requires an income of £13,400 a year, the PLSA said.