Why the state pension should be means tested

The state pension should only be offered to those who need it, says Merryn Somerset Webb.

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We should only pay state pensions to those who need it

The Cridland report produced last week ended up rather lost in the news about the attack at Westminster and the looming delivery of Theresa May's letter to the EU. But it is worth going back to it for a quick look.

It recommends the state retirement age being pushed from 67 to 68 by 2039 (current plans are 67 by 2028). It also suggests that the triple lock should go after this parliament, and that those who want to work past state retirement age should still be able to defer taking their state pension. All this seems reasonable given rising longevity and the huge cost of our state pension system.

One of the things it also considered and, to some complaint, has now rejected was the idea that there should be some flexibility in the state pension age; that those who are sick or disabled should be able to start getting it early.

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This, the argument goes, would mean that the state pension would be able to make some allowance for the varying life expectancies across the country. After all, if life expectancy is six years higher for those in the lowest socio-economic group than it is for those in the highest (this gap is at least narrowing, by the way) surely for everyone to get a fair crack at pension payments those in the lowest should be able to start getting payments earlier.

It's also true that the later you make the state pension age, the more likely it is that those in poor health will find there is a gap between when they stop working and when they get a pension income.

Former pensions minister Ros Altmann is all for it: "Because National Insurance is such a significant part of salary", she says, "it seems inequitable to lock out those people who we know have shorter life expectancy by continually raising the state pension access age." John Cridland doesn't seem to disagree with the premise here. But he reckons that attempting to differentiate is just too complicated and should therefore be ruled out. He suggests additional means-tested help for those near retirement age instead.

This makes sense. The key thing to note is that National Insurance is not a kind of personal insurance. If it were, those with lower life expectancies would pay a lower premium thanks to the expectation that they would take less income and this issue of paying in the same as other people and getting less out wouldn't exist.

What NI actually is, is income tax. There is no National Insurance fund, no personal record of premiums paid and benefits received nothing of the sort. Its just part of the huge pile of unhypothecated taxes that we all pay all every day to keep the government show on the road. From that pile comes the state pension, but also all the means tested benefits that we pay to those who need more than the state pension or who aren't working and aren't yet getting it. In these straitened times what's more important?

Look at it like that and there is surely more reason to means test the entire state pension (why pay it to those who don't need it?) than there is to offer non-means tested early payments to the unwell.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.