David and Denyse Vallender: ‘It’s a monumental government blunder,’ he said after she received £21,700
The Government is being pressed not to ‘add insult to injury’ by landing women underpaid massive sums in state pension with unfair tax bills.
Denyse Vallender, pictured right with husband David, was handed £21,700 due to government bungling, while Allison Clark has received £16,500, in the latest cases to emerge in a scandal uncovered by This is Money.
Both are normally on too low an income to pay tax, but their backpayments will push them into the basic rate income tax bracket this year.
Tax experts say it would be ‘deplorable’ and ‘hardly fair’ to make them – and potentially many other elderly women – pay tax they might have avoided if not for government error.
Tens of thousands of elderly women could be owed a fortune in lost state pension after a gigantic blunder stretching back decades.
We look at how money they were deprived of for years might now be taxed in more detail below and here.
The Department for Work and Pensions, which is facing demands for urgent action to address an estimated £100million shortfall in payments, has told us again that it is ‘checking for further cases’.
But the Government’s tax arm adds: ‘HMRC is working with the DWP to determine any tax implications of these payments as soon as possible.’
This is Money has covered cases of retired women receiving payouts totting up to around £74,000 in the past few months and reported on a staggering £117,000 handed to a 96-year-old widow underpaid for 20 years.
Why are some married women being underpaid state pension?
Married women who retired on small state pensions before April 2016 should get an uplift to 60 per cent of their husband’s payments once he reaches retirement age too.
Since 2008, the increases are supposed to be automatic, but before that women had to apply to get the full sum they were due.
Find out how to check if you are underpaid and what to do about it below.
Hundreds of emails have poured in from readers anxious to know if they have missed out on state pension too since we began our investigation.
We have received a handful of messages from women who have independently obtained between £7,000 and £21,500 from the DWP.
Former Pensions Minister Steve Webb, who first brought this issue to light in a column for This is Money, says: ‘It would add insult to injury not only to have been underpaid pension for many years but then face a tax bill when DWP finally put things right.
‘This would be especially unfair for a married woman on a low income who might not normally be paying income tax, and who would not have paid tax if the pension had been paid correctly from the start.’
Webb, who is now a partner at pension consultant LCP, adds: ‘DWP and HMRC need to issue clear guidance for pensioners so that they know what to do when they get a lump sum, and they must make sure that people are not worse off in tax terms purely because of an original error by DWP.’
How will backpayments to women due to government bungle be taxed?
Heather Rogers, founder of Aston Accountancy, says: ‘If you receive a large amount of backdated pension this could, if treated in full as income in the year you receive it, be taxed at a higher rate than if you had got it in the year it should have been paid.
‘This seems hardly fair, especially if no tax would have been payable if the right pension had been received at the time.
‘Depending on the amount of political pressure applied via parliament, there may be an argument for not taxing these payments at all, but people should certainly not bank on that outcome.’
Rogers believes HMRC could end up either allocating backdated pension to the tax years to which it should have applied, or treating backpayments like deferred state pension lump sums, which effectively means ignoring them for income calculation purposes to determine the tax rate which should be applied.
She urges women receiving backpayments to find an accountant, even if they do not usually use one, and to make sure they are a qualified tax adviser.
‘It will be worth your while to get this right, and have a professional in your corner to fight HMRC if necessary,’ she says.
>>>Read more here on what Rogers advises women receiving backpayments to do about tax
What does the DWP say?
A DWP spokesperson says: ‘We are aware of a number of cases where individuals have been underpaid state pension.
‘We corrected our records and reimbursed those affected as soon as errors were identified. We are checking for further cases, and if any are found awards will also be reviewed and any arrears paid.’
It notes that married women are required to make a claim to have payments increased if their husband reached state pension age before 17 March 2008, but not if he did so after that.
The DWP says it encourages anyone who thinks they have failed to claim a state pension increase they are eligible for to contact the department.
It adds that ‘interest and consolatory payments’ will be considered on a case-by-case basis and depend on individual circumstances.
The DWP’s contact details are here.
Mike Warburton, an independent expert and former tax director at Grant Thornton, says: ‘In my view it would be deplorable if pensioners who have been let down so badly have to pay more tax than would otherwise have been the case by, for example, taxing their back payments as income of the year they receive it.
‘Legislation already exists that could be applied to treat these amounts as tax free to non-taxpayers or at only basic rate to basic rate taxpayers, in the same way as applies to deferred state pensions, if government chose to apply it.
‘There is another reason why lump sum payments should not be taxed in full. State pensions are taxable by law on the basis of the year to which the pensioner was entitled to receive them and specifically without regard to when they were actually paid.
‘HMRC are not allowed to assess income tax for more than the current year and four years in arrears in these circumstances, so you should not have any tax to pay on your pension entitlement for years before that whatever your tax rate is currently.’
The DWP has refused to reveal how the massive state pension financial blunder happened, or what steps it is taking to identify women who may unwittingly be thousands of pounds out of pocket.
This is Money has asked whether it will pay any sums owed to the heirs of women who have died while receiving incorrect state pension, but had no response.
Labour’s Shadow Pensions Minister, Jack Dromey MP, has put down questions in parliament to press the Government about what it is doing to find and pay women who are affected.
He says: ‘It is nothing short of scandalous that hardworking women have been so drastically shortchanged on their pensions.’
On the latest two big backpayments to women that we cover below, he adds: ‘These cases demonstrate how inept the Department for Work and Pensions have been on this critical issue.
‘Simply transferring thousands of pounds in to individual bank accounts at a whim is not good enough.
‘Ministers must carry out a full inquiry into what has happened and, crucially, work out how many women there are who have been underpaid.
‘Every one of the women involved deserves every last penny of what they worked so hard for throughout their lives.
‘Yet there are likely many thousands who don’t yet know they are even affected by this scandal. This is simply not good enough.’
>>>Have you been underpaid state pension? Find out what to do below
‘It’s a monumental Government blunder, and there are people out there in greater need than us’
Denyse Vallender was receiving around £34 a week when her husband David read one of our stories about women being underpaid state pension.
He immediately realised their longstanding suspicion that her payments were too low might finally be vindicated.
Mike Warburton: ‘It would be deplorable if pensioners who have been let down so badly have to pay more tax than would otherwise have been the case’
Mr Vallender, a former head of risk and safety in social care, deferred his state pension until he was 72 because he carried on working well beyond his retirement age.
He says they were troubled for a long time about the size of his wife’s pension and that they asked the DWP about it twice, first when she reached state pension and again when he ended his deferment, but they were told it was correct.
‘I have been looking for any indication that this was wrong,’ says Mr Vallender. ‘I thought, at last, is this something that will point us in the right direction. It never seemed right.
‘It just seemed wrong in terms of fairness. It’s the way we both felt.’
The couple, who are both 76 and live in Northamptonshire, wrote to This is Money and we contacted the DWP on their behalf. Mrs Vallender is receiving £21,321 in arrears and £368 interest.
Mr Vallender says regarding his own experiences dealing with the DWP: ‘On their website it’s not clear how you can approach them with a complaint about this.
‘I sent a message to their complaints line. Naturally I have had no reply. I didn’t think to ring them because it’s a waste of time. You have to be really lucky to speak to someone.’
Simply transferring thousands of pounds in to individual bank accounts at a whim is not good enough. Ministers must carry out a full inquiry’
Labour’s Shadow Pensions Minister, Jack Dromey MP
Mrs Vallender’s backpayment indicates that a husband deferring his state pension won’t have a negative effect on how much his wife might receive in arrears, but the Government has refused to confirm this.
‘It’s a monumental government blunder. I am sure they didn’t want this to be found out. I can’t stress to you enough how lucky we feel we saw your article,’ says Mr Vallender.
He says he and his wife are delighted and feel that justice has been done, but although the payment will make things a lot better for them, they are concerned for people for whom such a sum would mean even more, and are still receiving too little.
‘We both feel there are people out there who are in greater need than us. There must be people out there suffering and that means this is very wrong.’
‘They just need a computer programme to do this calculation, it’s not rocket science’
Allison and David Clark contacted the DWP in response to our previous news stories, and within seven days just over £16,046 was deposited in her bank account.
But this did not include interest, and the couple from Glasgow got nowhere in their efforts to chase this up themselves.
STEVE WEBB ANSWERS YOUR PENSION QUESTIONS
In a call to the DWP, Mrs Clark was told her state pension would be increased from around £41 a week to just over £84.
But staff wouldn’t tell her whether her lump sum included interest, or whether this would be added later.
After This is Money intervened, an additional £435 was paid to Mrs Clark, who is 74 and a former secretary at a university.
The DWP has said ‘interest and consolatory payments’ will be considered on a case-by-case basis and depend on individual circumstances.
The Clarks’ case shows that it might not include or mention interest when it makes a backpayment, and that women could have to follow up to ensure this is also paid.
Mrs Clark is currently a non-taxpayer, and the couple are concerned that the payment will push her into the basic rate tax bracket, so are keen to get a full breakdown of the figures.
Scottish income tax rates differ slightly from those in the rest of the UK- read more here.
‘The money just appeared in her bank account. We have no idea how it is made up,’ says Mr Clark, 75, who was an accountant in the shipping industry before he retired.
He had no idea before reading our story that his wife’s state pension might be too low, and is baffled that the DWP hasn’t discovered the problem before now.
‘I had never heard of it. Once the money hit the bank account I told all my pals and they had never heard of it.
‘The DWP has all the information it needs like my date of birth and my wife’s, and what we get in state pension. They just need a computer programme to do this calculation. It’s not rocket science.’
Mrs Clark adds: ‘I can’t understand why if they have made all these mistakes they didn’t do something about it sooner.’
Has the DWP contacted YOU about underpaid state pension?
The Department for Work and Pensions has told us it is ‘checking for further cases’, but revealed nothing more about the extent of its probe.
If you have had notification about underpaid state pension and/or a backpayment without contacting the DWP yourself first, we would like to hear from you.
Write to Steve Webb at firstname.lastname@example.org and tell us the details. Please put DWP CLAIMS in the subject line.
IMPORTANT: If someone contacts you out of the blue by letter, phone or email claiming to be from the DWP, take precautionary steps before responding or giving away any personal details.
Go here to find the official contact details for the DWP, and use them to check and confirm if it was a legitimate approach.
But Webb stresses that the website is simply designed as a useful tool, and anyone with any doubt about the amount of pension they are receiving should contact the Department for Work and Pensions.
TOP SIPPS FOR DIY PENSION INVESTORS
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