In the furore surrounding the Government’s plans to means test the Winter Fuel Payment at the level of those qualifying for pension credit, a lot has been made of the fact that “pensioners” have never had it so good, and that a large part of this benefit is going to some of the richest people in the country.  

Indeed, data from the Resolution Foundation suggests that the incomes of pensioners may now exceed those of working-age people:

[.fig][.fig-title]Figure 1: Pensioners' Incomes May Now Exceed Working Age Incomes Across the Distribution[.fig-title][.fig-subtitle]Levels of real equivalised household disposable incomes, after housing costs, in 2022-23 prices: GB/UK[.fig-subtitle][.fig]

[.notes]Source: Resolution Foundation, "An Intergenerational Audit for the UK", 2023. Available here.[.notes]

It is undoubtedly true that many of those in receipt of the Winter Fuel Payment in no way need it, however, to discuss the experience of pensioners as a group without disaggregating by gender is misleading, even irresponsible. Often forgotten in these intergenerational comparisons is the “gender pension gap” — the difference in retirement income or retirement wealth for men and women — which is more than twice the level of the gender pay gap. In 2019-2020, for example, Prospect trade union found that the gender pension gap was 37.9 per cent, compared to the gender pay gap that year which was 15.5 percent.

Retirement income comes predominantly from the state pension and occupational pensions. The state pension in the UK lags behind OECD norms. It is, by design, set at an income that is not expected to enable an adequate quality of life. The Pensions and Lifetime Savings Association publish an annual report on retirement living standards in which, for 2024-2025, they estimate the minimum income required “to cover needs and allow a small amount in reserve” is currently £14,400 for a single person — roughly £277 per week. The lifestyle this affords would entail having £50 per week for groceries. There is no provision for running a car, and housing costs are assumed to be zero. The full state pension is £221 per week — £50 short of target.

As well as being set lower than average, the UK has a higher bar for qualifying for the state pension. The full pension requires 35 years of contributions. Unsurprisingly then perhaps, many do not qualify for the full amount. In fact, the DWP revealed that in 2022 less than half of the female recipients of the state pension received the full amount. If you do not qualify for the full pension, you can claim pension credit: 66 per cent of pension credit claimants are women. However, there are currently over 800,000 people who qualify for pension credit and but who do not claim it, for a plethora of complex reasons. Charities including Age UK (formerly Age Concern) have been trying to address uptake for many years, but there is no quick-fix solution. As was noted by the BBC’s Ben Chu, if all those eligible did start claiming pension credit, the cost (£2 billion) would outweigh the savings (£1.4 billion) from means testing the Winter Fuel Payment. Arguably, the most coherent response to these issues would be to move away from a contributary pension scheme to a residency-based one (whereby you qualify for the state pension based on having been resident in the country for a certain number of years), which has been shown to increase coverage and reduce pensioner poverty rates.

Private pension wealth — held in occupational and private pensions — is expected to top-up the state pension in the UK system. This is where the “pension gap” is located, because private pension wealth is distributed even less equitably than other wealth.  

[.fig][.fig-title]Figure 2: UK Pension Wealth is Very Unequally Distributed[.fig-title][.fig-subtitle]Distribution by wealth decile, 2020[.fig-subtitle] [.fig]

[.notes]Source: Bruno Bonizzi, Jennifer Churchill, Sahil Dutta and Adrienne Buller, "Undefined Benefit: Fixing the UK Pension System", Common Wealth, 2023. Available here.[.notes]

As we argued in our report for Common Wealth, the link between contributions and benefits is tighter for occupational pensions. Those with higher incomes make higher contributions and receive higher contributions from employers, and so have higher benefits. Social structures embedded in the labour market, such as differences in pay between gendered and/or racialised groups are reproduced and exacerbated.

[.fig][.fig-title]Figure 3: There is a 35 Per Cent Gap Between Male and Female Uncrystallised Non-Zero Median Pension Wealth Around Normal Minimum Pension Age (NMPA) in 2018 to 2020[.fig-title][.fig]

[.notes]Source: DWP estimates derived from the ONS Wealth and Assets Survey, GB 2018-2020. Available here.[.notes]

Time out of the formal labour market is hugely detrimental. Parental leave is just the beginning; women are far more likely to adopt part-time working arrangements and re-join the labour market through taking jobs below their level of education and experience. This gendered norm of labour market participation seems unlikely to change anytime soon, especially when the state offer of shared parental leave has fallen flat.  

[.fig][.fig-title]Figure 4: Major Inequalities in Pension Wealth Persist Between Different Groups[.fig-title][.fig]

[.notes]Source: Bonizzi, Churchill et al., "Undefined Benefit: Fixing the UK Pension System", Common Wealth. Available here.[.notes]

The nature of engagement with the formal labour market also affects access to occupational schemes. Employers only have to auto-enrol workers above a minimum level of pay. Workers who engage in low paid work across several different jobs can therefore miss out and not receive employer contributions. Those who are self-employed lose out on employer contributions, adding an extra dimension of concern for the growing adoption of “gig economy” norms across many sectors.

Opposition to the Government’s proposal to means test the Winter Fuel Payment does not therefore stem from a lack of awareness of those pensioners at the top of the income and wealth distribution, but from the bluntness of policy. A means test could be defendable if higher up the retirement income scale. There are also arguments for getting rid of hypothecated benefits altogether and just increasing the basic state pension.  

An equitable reduction of expenditure pressure on the state begins much further upstream — breaking down the processes that are leading to over 60 per cent of pension wealth being held by the top decile. The state plays a direct role in this process through tax relief paid on pension contributions. In the 2022/23 tax year, the net cost of this tax relief (relief paid on employee and employer contributions, minus tax received on pension income) was estimated at £48.3 billion. This substantial expenditure is highly regressive. A 2016 report by the Resolution Foundation calculated that 63 per cent of relief went to the top 15 per cent of earners.

Unlike means testing the Winter Fuel Payment, cutting off tax relief at the lower rate of tax would not “accidently” hit those already in poverty, and it would not exacerbate gender and other intersectional inequalities. There remain questions around implementation, many of which arise from the stark differences that exist between defined benefit and defined contribution pension schemes. There are also other options such as reducing the 25 per cent tax-free lump sum at retirement. The Institute for Fiscal Studies’ pension review has detailed analysis of possible ways forward. Without question, the inadequacy and inequity of the current pension system is in urgent need of attention.