Latest news with #HeidiKarjalainen
Times
5 days ago
- Business
- Times
Is it time to means-test the state pension?
The new state pension is paid to those who paid enough national insurance, regardless of whether they have any other retirement income. The amount you get is guaranteed to go up in line with the highest of inflation, wages or 2.5 per cent thanks to the triple lock — a guarantee that the Office for Budget Responsibility says will cost the government £15.5 billion a year by 2029. We ask if payments should be limited to those who need them. Heidi Karjalainen from the Institute for Fiscal Studies Means-testing the state pension is often floated as a potential way to rein in public spending. The logic seems straightforward: why should state support go to already wealthy pensioners? However, the state pension is an important source of retirement income even for relatively well-off pensioners. It makes up 23 per cent of the income of the top 20 per cent of the highest earners among the recently retired, according to our research in 2023. You'd have to be really very well-off not to miss the £230.25 a week that the full state pension is now worth. Second, means-testing disincentivises saving. If your level of state pension depended on how much you had in your private pension, then each pound saved would deliver a smaller net return. This would discourage people from saving more and could deter participation in workplace pensions altogether. Making decisions about private pension savings is already complex, and means-testing the state pension would make it even more difficult. You would have to consider the effect that additional savings would have on your future state pension income. • Fixing the retirement crisis means tackling public sector pensions Automatic enrolment into workplace pensions would also be harder to justify if the state pension was means-tested, as some might see no benefit from saving in a private pension. Proponents of means-testing often point to Australia as an example of where it works. However, Australia's means-testing of the public pension is balanced by compulsory (and high) private pension contributions during working life, meaning that most retire with substantial private pensions. In the UK, where we rely on a voluntary, but strongly encouraged, private pension system, it would not work as effectively. The state pension, as it stands, provides a solid foundation for retirement incomes for most people. When considering how to control the rising costs of the system, the government should instead focus on setting the state pension age and when and how to move on from the generous triple lock increases. • Read more money advice and tips on investing from our experts Edmund Greaves, editor of the Mouthy Money podcast and former deputy editor of Moneywise magazine The state pension is unsustainable in its current form. It is the single largest cost in the Department for Work and Pensions budget, accounting for 46 per cent of all benefits spending, according to the National Audit Office. Government forecasts put the bill at £168.7 billion for the 2029-30 tax year, which represents a 141.5 per cent rise since 2010-11 or more than 7 per cent annually. When the triple lock was introduced in April 2011, it rightly sought to address the pension's modest size relative to other minimum income benchmarks, such as the national living wage. But unlike every other benefit, the state pension is not means-tested. It is based solely on national insurance contributions, regardless of overall wealth. Millions of people in retirement now get payments they simply do not need. According to the Office for National Statistics, the median net wealth of households with a head aged 65 to 74 between April 2020 and March 2022 was £502,500. These people can fund their retirement without taxpayer help. Past governments have tweaked the system by raising the pension age and making it the same for men and women, but they have avoided the central question of why the wealthier should be paid the same as those who rely on the pension to survive. Next year marks an inflection point because the full state pension will, for the first time, exceed the income tax personal allowance — the amount of income you can have tax-free. This means that some of the state pension could be taxable and those pensioners without tax-sheltering options for any additional retirement income will pay tax on it while others will be able to rearrange their finances to avoid this. It is an indefensible imbalance. Instead of endless debates over the triple lock or incremental increases in the pension age, we should start means testing. A fair approach would be to assess net worth at state pension age and direct support to those who truly need it. Relying on the tax system to claw back payments from the rich will never deliver enough savings. The state pension is a cornerstone of the UK's social contract. If the state continues to distribute it indiscriminately, funded by working-age taxpayers, that contract will erode. Those who have, laudably, built enough wealth to fund their retirement should not get state support they do not need. Means testing would protect the poorest, reduce unfairness, and put the pension budget on a sustainable footing for the future.
Daily Mirror
22-04-2025
- Business
- Daily Mirror
DWP State Pension warning issued as thousands of Brits don't understand vital rule
According to new research from the Institute for Fiscal Studies (IFS), there are "significant knowledge gaps" among Brits who are currently approaching retirement A warning has been issued as thousands of Brits do not understand the Department for Work and Pensions' (DWP) state pension age. According to new research from the Institute for Fiscal Studies (IFS), there are "significant knowledge gaps" among Brits approaching retirement. The study found that just four-in-10 people with a state pension age between 66 and 67 correctly know their state pension age within three months. A concerning 42% overestimated when they could claim their pension, while 12% underestimated it, and a further 5% admitted they had no idea when they could access their state pension. Currently, the UK's state pension age is 66 for both men and women. However, starting next year, it will gradually increase, rising to 67 in April. The transition process is then expected to be completed for everyone by March 2028. The planned change to the official age of retirement has been in legislation since 2014, with a further rise from 67 to 68, which is set to be implemented between 2044 and 2046. The picture is slightly better for those with a state pension age of 67, with 60% knowing they can claim the DWP payments from this age. The IFS expressed particular concern that 11% did not know their state pension age at all. Another 11% underestimated it, meaning 22% of individuals overall have major knowledge gaps regarding when they can claim their payments - this equates to approximately 130,000 people. The IFS warn that these misunderstandings could lead to poor decision-making about savings or retirement timing. Sign up to Mirror Money's newsletter for the latest advice and news From universal credit to furlough, employment rights, travel updates and emergency financial aid - we've got all of the big financial stories you need to know about right now. IFS senior research economist Heidi Karjalainen commented: "If individuals discover that they have to wait longer than they had thought to claim the state pension, they may regret having retired or not having saved more." She emphasised this is "especially important" as the state pension age rise from 66 to 67 is "imminent", adding: "It is important that there are clear communications from both the government and private pension providers." Join Money Saving Club's specialist topics For all you savvy savers and bargain hunters out there, there's a golden opportunity to stretch your pounds further. The Money Saving Club newsletter, a favourite among thousands who thrive on catching the best deals, is stepping up its game. Simply follow the link and select one or more of the following topics to get all the latest deals and advice on: Travel; Property; Pets, family and home; Personal finance; Shopping and discounts; Utilities. The last increase to the state pension age was introduced in December 2018 when it started to rise from 65 to 66. This was completed by October 2020, and those affected by this change were women born on or after April 6, 1953 or a man born on or after December 6, 1953. The next rise in the state pension age will begin in April 2026, affecting anyone born after 6 April 1960. The next rise to 68 would impact those born after April 1977. However, the plans may change. Under the Pensions Act, the state pension age is reviewed regularly once every five years. The review often returns recommendations that the government accepts, rejects, or comments on. The 2017 review suggested the rise to 68 should be in 2037-39, which would affect those born between April 6, 1970 and April 5, 1978. However, the 2022 review recommended a slower increase to 68, in 2041-43, and it mooted a possible rise to 69 in 2046-48. The former Tory government acknowledged the recommendations but delayed the decision, promising to hold another review within two years of the next parliament. The next review will be held under the Labour government.
