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More grief for women pensioners in £1bn state pension scandal

Paloma Kubiak
Written By:
Paloma Kubiak

The initial victory for women pensioners underpaid state pensions has now turned sour as the refunds are subject to tax and lump sum payments could impact benefit claims.

The issue relates to the ‘old’ (pre-April 2016) state pension system where women could claim a state pension based on the National Insurance record of a husband, ex-husband or deceased husband.

Although in most cases the system worked correctly, an investigation revealed some women were not benefiting correctly from these rules as far back as 1985.

Initially it was estimated that tens of thousands of women were underpaid the state pension, with calculations suggesting the Department for Work and Pensions (DWP) faced a bill of £100m in refunds.

However, the scandal deepened as DWP set aside £1bn while the ‘shameful shambles’ of underpaid state pensions actually affects 134,000 women, who are owed an average of £8,900 each.

Now, there’s further grief for these women as it’s revealed the refunds, which will be paid out over the next couple of years, are subject to tax. Further, the lump sum may affect benefit claims.

Steve Webb, partner at pension consultant LCP and former pensions minister who discovered this scandal, said the payments are subject to tax as they are deferred payments of state pension which is taxable.

But he explains that recipients won’t be taxed in one big lump as only the current tax year and last four tax years are relevant.

Income tax is calculated on arrears of state pension for the tax year in which the pensioner was entitled to receive it, and not in the year in which a lump sum is paid.

Further, tax will only be due on any income that exceeds the personal allowance for the respective tax year.

Webb said: “For many of these women, even an enhanced state pension leaves them under the tax threshold so there’s no tax to pay.”

‘People need to understand impact of lump sum’

He added: “It is shocking that so many people, predominantly women, were underpaid for so long, and it will be several years before they all get what they are due. Even then they will have lost out because DWP is refusing to pay interest.

“People also need help to understand what impact a lump sum will have on their tax and benefit position. The rules around the taxation of lump sums are complex and need to be explained clearly.

“People also need help to understand what impact receiving a lump sum could have on any benefits they are receiving or help with care costs from their local council. As DWP caused this problem in the first place, they should be doing far more to minimise the damage”.

DWP said letters sent out to recipients explain the tax position, adding that customers don’t need to take any action themselves as DWP will provide information about any state pension arrears payments directly to HMRC.