I'm worried that means-tested pensions might come in before I retire - how likely is it? STEVE WEBB replies

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State pension: One reader is worried that they might lose their state pension entitlement

I am 63 next birthday and so approaching retirement at 67. 

I've been a single parent for many years and could not afford to pay into a work pension largely due to starting work later in life and now the high cost of living.

I have no savings and live from month to month.

I am, however, due to finish paying my mortgage on a modest home in a couple of years. 

I will downsize to a flat and for the first time have some savings in the bank. 

Given I will be maybe just two years off of receiving my state pension, I'm concerned that those in power at the moment will say I can't have my state pension because I have over £50,000 in the bank.

How likely is this means testing likely to be put in place before I retire in four years time? 

Also if it is do I need to spend my money before I am forced to live on it? I have paid 40-odd years of NI contributions.

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Steve Webb replies: Earlier this year I responded to another reader concerned about the risk of the state pension being means-tested. 

In that column, I ran through some of the other ways in which a government might control state pension spending rather than resorting to means-testing.

But since then we've had a change of government and some senior Labour advisers talking about means-testing, so I thought it was worth returning to the topic to ask how likely this is.

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

Former HMRC executive, Sir Edward Troup, who has given tax policy advice to the new Chancellor, told LBC radio '..if the public finances are in a bit of a state, perhaps wealthy pensioners should be giving up their full state pension'.

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David Blanchflower, a former member of the Bank of England's monetary policy committee, said earlier this year: 'An incoming government is going to have to means-test stuff. 

'They are going to have to raise the basic pension a lot for the poor, and probably means-test it'. 

The Chancellor has warned of more 'tough decisions' to come in October's Autumn Budget whilst the Prime Minister has said things 'will get worse' before they get better; this suggests that policies which might once have been regarded as politically 'unthinkable' are now at least on the table.

In terms of what this could mean in practice, this government – or a future government – could simply decide that those who have a good workplace pension will get a reduced rate of state pension. 

They could also decide that people with relatively large amounts of wealth (such as investments, second homes etc) would receive a reduced rate of payment.

There is some precedent for this in the Australian pension system – which has been much lauded by UK pensions ministers – where the 'age pension' is subject to both an income test and a wealth test. 

In brief, in Australia, you are allowed a certain amount of private income on top of your age pension, but if you have 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 area' - but above this your pension is docked at $3 per fortnight for each $1,000 of assets.

As a result of this combined income and assets test it is estimated that only around two in five Australians gets the full amount, around a quarter get a reduced amount, and the rest of retirees either get nothing or do not claim. 

Interestingly, this research estimates that the proportion of Australians getting a full age pension will fall sharply over the next decade or so.

It would be fair to say that for the UK government to introduce something like this would be a 'nuclear option' and would make the row over Winter Fuel Payments look like a walk in the park.

Many people already in retirement would feel very aggrieved if they had planned carefully, perhaps sacrificed income whilst in work to save for a better retirement, only to find out that the 'rules of the game' were changed after it was too late to do anything about it.

As a result of this, I think it's very unlikely that any move in the direction of means-testing would apply to those already in retirement.

However, a similar argument would apply to those – such as you – who are coming up to retirement and have also made plans which it would be very difficult to change. 

So some form of transitional protection might be needed in this case as well.

On your specific question, if you knew that you *were* going to be means-tested then it would be very tempting to spend down your savings before you retire to make sure that you qualify for the full amount. 

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But the Government is likely to be wise to this risk and already has ways of penalising anyone who has 'deprived' themselves of capital simply to get more benefit (or pension in this case).

But, crucially, if the Government recognises that it has to exempt those in retirement or near retirement, it means that they will get no money at all from the policy for many years. 

Yet they would get all the political grief on day one.

On the whole, politicians prefer policies which generate lots of early money and minimum fuss, whereas this is the precise opposite – no money for years and huge opposition. 

Having seen the hostility generated by removing Winter Fuel Payments, it seems to me exceptionally unlikely that the Chancellor would now double down by attacking the state pension itself.

This does not, of course, mean that pensioners will necessarily escape some of the further tough medicine we have been promised. 

Wealthier pensioners could well see a tougher regime for things like capital gains tax and/or inheritance tax. But my judgment is that raiding the state pension would be seen as a step too far.

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