It wasn’t long after the general election that the media started to speculate about what the new Government might have up its sleeve for people’s finances. This has resulted in some media pundits speculating that the new Starmer-led Government could change the rules around the State Pension and subject it to means-testing.
While it should be stressed that Labour has done nothing to warrant the speculation, an article published in July makes for interesting reading. It reveals that a senior adviser to the Prime Minister has suggested that the State Pension should be means-tested, which may have implications for millions of people’s retirement plans?
Read on to discover what means-testing the benefit might mean for you and the action you could take to protect your retirement lifestyle from it. Before you do though, let’s consider how the State Pension currently works.
The pension provides a significant financial boost in retirement
While the State Pension is only designed to provide a basic standard of living when you retire, it can provide a significant boost to any other pension income you receive when you stop working. And as it’s not means tested in 2024/25, Britons can include it in their retirement strategy regardless of how much income their private or workplace pension may provide.
If you’re entitled to the full single-tier State Pension, you’ll receive £221.20 a week or £11,502.40 a year (2024/25). This could provide more than £23,000 a year if you’re cohabiting, married or in a civil partnership.
To ensure the benefit retains its spending power, the ‘triple lock’ system was introduced in 2010. It makes sure that the benefit increases every year by the highest of the following three:
- inflation
- average earnings growth
- 2.5%.
To receive any State Pension you’ll need a minimum of 10 years’ worth of National Insurance Contributions (NICs) on your record. To qualify for the full amount you’ll need more than 35 years’ worth.
If you have between 10-35 years’ worth of contributions, you’ll receive a portion of the full amount based on how many NICs payments you’ve made.
Means testing might reduce your standard of living in retirement
If you’re looking to enjoy a certain standard of living when you retire, you could be building up a private or workplace pension capable of providing most of the income you need. The rest could then be made up using the State Pension.
If, however, the benefit becomes means-tested, your workplace or private pension may result in the amount of State Pension you receive being significantly reduced. As such, you may not then be able to afford the retirement lifestyle you were planning.
While this could have serious implications for your retirement, it should be remembered that at the time of writing this blog, the idea of means-testing is nothing more than speculation.
Additionally, in April 2024 former pensions minister Steve Webb said it was ‘unlikely’ to happen in the foreseeable future.
That said, this does not mean means-testing will not be introduced at some point, something that might have implications for your retirement. There is good news though, as there are steps you could take to protect your dream retirement from the possibility of means-testing.
You could safeguard your retirement against means testing
There are actions you can take to ensure your pension provides the retirement lifestyle you want regardless of what happens to the State Pension. These include:
- retiring later – this could allow you to continue building your pension pot, so that it provides the level of income you need to fund your standard of living, even if the State Pension does become means-tested
- boosting your contributions – this could also help you to increase the value of your retirement fund, so that it can fund your dream lifestyle regardless of what happens with the State Pension
- adjust your standard of living – another option might be to reconsider the standard of living you want in retirement. A financial adviser can help you understand how much income you might need if you do amend the standard of living you aspire to, and whether your pension could fund it without the current level of State Pension
- adjust the level of risk your pension is exposed to - while doing this could expose your retirement fund to greater growth potential, it could also increase the possibility of losses. For this reason, you should always speak to a financial adviser before increasing or decreasing the level of risk your pension is exposed to.
Get in touch
Regardless of whether the State Pension becomes means-tested or not, understanding whether your retirement fund will support the standard of living you want is vital. Speaking to a financial adviser can ensure you understand whether your private or workplace pension is on track to provide the lifestyle you want.
If it’s not, an adviser can help you understand how you could get it back on track. If you would like to establish whether your pension will provide your dream retirement, please speak to one of our advisers or contact us on 01527 577775.
Wednesday 7 August 2024