Martin Lewis gives state pension 'means testing' update and adds 'could occur'

Personal finance expert Martin Lewis has explained how likely he believes the state pension could switch to being means tested - and if the triple lock is under threat. Mr Lewis spoke out after a listener to his BBC Podcast asked if it was likely that the state pension could even be ended.

He spoke out as it emergedthat the state pension is set to rise by 4.7% next year, with the high rate caused by the 'triple lock' which some financial experts think is 'unsustainable.' On the podcast, when asked if the state pension could be scrapped, he answered: "Yes, it is possible. Parliament is what is called omnicompetent - a technical term meaning parliament can legislate anything it chooses to do. Do I think it's likely? No."

But Mr Lewis said that people could be forced to wait longer - it's already set to rise between now and 2028 from 66 to 68. He said: "I think the most likely eventuality with the state pension is that the age at which you get it is increased. And I certainly think by the time someone who is 18 now retires it's probably going to be in their 70s when they get their state pension, not in their late 60s.

"I would say what you're asking is what are the risks to the state pensions and I'm going to give you in order of likelihood. So I would say that is the most likely risk.

"The next most likely risk, and I think we've moved from the first one, which is probable, so I think that is likely to happen. This next one I think is unlikely to happen but not improbable.

"Limited odds, but I wouldn't be bowled off my chair if it were to happen sometime in the next 20-30 years." Caller John said he was 53.

Mr Lewis explained that means testing was one possibility - with that change basically hitting people's state pension income in relation to how much they earn elsewhere: "I still think this is unlikely by the time you hit your state pension age but maybe not impossible by the time you're getting on later in life, in your 80s, is a means testing of the state pension.

"The state pension is already taxable. The income you get from the state pension counts towards your taxable income. If you only get state pension income at the momentis under your personal allowance - the amount you can earn tax free. But if you have state pension income and other income they both are added together and it counts as taxable income. Means testing could occur - they'd just say the amount that you're going to get depends on how much other income you have.

"I still think it's unlikely. It would be hugely hotly contested. I think certainly if you were a government and you wanted to do something unpopular, that would be incredibly unpopular. It would be less unpopular to get rid of the triple lock.

"Triple lock says each year the state pension goes up with the higher of average earnings, inflation, or 2.5%. Which means it's guaranteed to keep rising. Before we saw means testing we'd see the end of the triple lock or you'd get rid of the 2.5% minimum because it means it keeps going up and up and up disproportionately to everything else." Mr Lewis aaid the least likely was getting rid of the state pension itself.

After the news of the average wage increases in the UK meaning state pensions are set to rise by 4.7 per cent next year, Mr Lewis said:"We know this as it is 'triple locked', ie rises by the higher of 2.5% or inflation or average earnings rise. The final figure has just come in, for earnings up to July and it's the highest of the three, at 4.7%."

He said that based on that the full state pension , ie for someone with all the qualifying national insurance years) is set to rise from:

• NEW state pension £230.24 to £241.05/wk
• OLD state pension (retirees pre Apr 2016) £176.45 to £184.75/wk

He warned: "This will take someone on the full new state pension to £12,535 a year, only £35 below the frozen personal allowance (amount you can earn tax free each year).

"So as state pension income is taxable, that means without any question the following year (unless something changes), those on the full new state pension with no other income will for the first time pay tax on it (as it will rise a minimum 2.5% and personal allowances are frozen)."

Listen to thefull podcast here.