AbstractThe use of selective benefits, directed to those considered most in need, has a high ‘poverty reduction efficiency’. But selectivity inevitably produces non‐linearities in the budget constraints facing individuals, which may have incentive effects. The design of a tax and transfer scheme requires these two aspects to be carefully balanced. This article considers the issues in the context of means‐testing within the Australian and UK State pension schemes. In the Australian case, the main question concerns the incentive to save, while in the UK scheme the ‘earnings rule’ presents a strong disincentive to work beyond