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Why are people on pension credit better off than me? Steve Webb replies

I worked to get my full state pension in retirement, so why are people on pension credit better off than me? Steve Webb replies

As I retired this year, I was given the full pension of £700 per month, which meant I was classed as not needing pension credit.

However, people who can claim this credit (making their income £700, the same as me) do not not have to pay council tax, plus lots of other benefits.

I have worked for six years longer than those on original state pension, but I am now in effect £140 a month worse off because I cannot claim this benefit. How can this be classed as fair?

Retirement finances: I worked to get my full state pension, so why are people on pension credit better off than me?

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Steve Webb replies: The position of people who have contributed and built up a full state pension relative to those who need to rely on a means-tested top-up is always a controversial one.

As I will explain, in some ways the potential unfairness has diminished in recent years, but it is true that people on certain benefits can get more help than people not on benefit.

Until the new state pension was introduced in 2016, there was quite a strong argument that it was a waste of time saving small amounts of pension because all it did was deprive you of other benefits.

To give a specific example (and using today’s figures), the full old-style basic state pension is worth £137.60, and someone who was self-employed all their life and only built up a basic pension might well be getting this figure.

Meanwhile, the pension credit rate is currently £177.10 for a single person.

Steve Webb: Find out how to ask the former Pensions Minister a question about your retirement savings in the box below

Steve Webb: Find out how to ask the former Pensions Minister a question about your retirement savings in the box below

This means that the self-employed person in this example could get nearly £40 per week of pension credit to top up their income.

Any private pension they had built up would reduce their pension credit. So it could be argued that the first £40 of private pension saving was largely a waste of time.

Because of the existence of the ‘savings credit’, the calculation would not be quite that simple, but most of the benefit of the private saving would still be clawed back.

It was partly to address this sort of unfairness that the new state pension system was introduced.

All of the previous elements of the old system (basic pension, additional state pension and so on) were rolled into a single ‘flat rate’ figure, currently set at £179.60 per week.

The idea of the new system is that workers would build up a full flat rate pension at this rate and would also be ‘automatically enrolled’ into a workplace pension on top.

Taken together, these two pensions would give a typical worker a significantly higher income than someone who was purely dependent on pension credit of £177.10 per week.

It is true, as you point out, that getting pension credit can also be a ‘passport’ to other forms of help.

I paid NI for 44 years but get a smaller state pension than people retiring now on £179.60 a week – how is that fair? 

A steady stream of older readers write in to Steve asking how come they retired on a much stingier state pension than the full rate of £179.60 available today.

He explains in a previous column here how the revamp in April 2016 was designed to be fair to everyone, and why people who reached state pension age before that don’t need to feel hard done by.

Those on pension credit can get help with rent or council tax, can qualify for cold weather payments and, when aged 75 or over, can get a free TV licence.

But it is not true to say that if you are just a few pounds above pension credit level you get none of these things.

In particular, help with rent and council tax is also available to low income pensioners even if they are slightly above pension credit levels.

In your own case, if your income is literally just a few pounds above pension credit, you should contact your local authority about help with council tax.

They will take account of any savings you have, but in principle you should be able to get some help with your council tax even if your income is slightly above the pension credit threshold.

You may be interested to know that the number of people coming within the scope of the pension credit system is steadily declining each year, with around one million fewer recipients than a decade ago.

As you may know, I was involved in designing a lot of the current system and my aim was to make sure that as many people as possible built up both a decent state pension in their own right and a private pension on top, but with a decent safety net for a steadily reducing number of people who had no other income to rely on.

Ask Steve Webb a pension question

Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.

He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.

Steve left the Department of Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock.

If you would like to ask Steve a question about pensions, please email him at pensionquestions@thisismoney.co.uk.

Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.

Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.

If Steve is unable to answer your question, you can also contact The Pensions Advisory Service, a Government-backed organisation which gives free help to the public. TPAS can be found here and its number is 0800 011 3797.

Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.  

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