My mum was underpaid state pension for years and is now penalised by the council

My mother is a victim of the £3billion state pension scandal. It now appears that she is being victimised again by the local authority.

Due to this scandal my mother has recently received a sizeable payment from the Department for Work and Pensions, because of their ineptitude going back 12 years to when my father passed away.

Now because of this payment the local authority has ceased my mother’s housing and council tax benefit, because they have deemed this payment as capital which takes my mother above the £16,000 savings limit. 

State pension: My mum was underpaid for 12 years due to the DWP blunder, and now she’s being penalised by the council over her large backpayment

So not only has she been underpaid by the DWP for the past 12 years, this underpayment, that has now been rectified, is going to be taken back from her in time by the local authority.

Is this something that the local authority can do? I also wonder how many other women will be in the same boat as my mother and be victimised twice for money they were entitled to and were not paid over many years, only for their benefits to be stopped once they received it?

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Steve Webb replies: Following the campaigning work that This is Money and I have been doing on underpaid state pensions, it is estimated that around 200,000 people will receive backpayments totalling around £2.7billion over the coming years.

This means that the average lump sum will be around £13,500, though some will receive less than this and others a lot more – in some cases more than £100,000.

Readers have sent in a number of questions, similar to yours, asking how receiving these sums will affect their tax liability and eligibility for benefits and other forms of means-tested help.

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

I will therefore answer your question and a range of related ones below.

Tax: You will not be taxed on whole sum in one year

On income tax, we have a relatively clear answer from the Government. Although the state pension is taxable, and lump sum arrears payments are taxable, you are not taxed in one year for the whole of this lump sum.

Instead, you are taxed as if you had received your pension payments each year on time. In addition, any payment relating to a year more than four full financial years ago can be ignored.

Many women on modest state pensions and with limited other income would not have been taxpayers even if they had been paid at the correct rate at the time.

This means they don’t need to pay any tax out of their lump sum. But others, who were taxpayers even without the increase (or who would have been if they had been paid at the correct rate) may have to pay some income tax out of their lump sum.

It may be worth asking for one-off help from an accountant to make sure you get the right answer.

Still on tax, another reader has asked about the inheritance tax position of those who receive a lump sum.

Our understanding is that any lump sum that you now receive would simply become part of your estate along with any other assets.

If you were unfortunately to die shortly after receiving a lump sum, and if you have a relatively large estate, it is possible that inheritance tax could then be due on the lump sum you have just received.

Benefits: Boost to your savings could reduce the help you get

Turning to benefits, the rules are slightly different.

Although the payment you have just received relates to weekly pension payments you should have been getting, possibly over many years, it is now simply a lump sum sitting in your bank account.

Unless DWP decides that such payments should be ignored when working out your benefit, having additional savings could reduce your benefit. The way in which this works varies from benefit to benefit.

The main ones of relevance are:

– Pension credit: The first £10,000 of savings is ignored, but each £500 above this level is treated as generating £1 per week in income; there is no maximum savings limit;

– Housing benefit and council tax support: The rules on savings are tougher for these benefits than for pension credit; once you have more than £6,000 in savings this will be taken into account when your benefit is worked out, and if you have more than £16,000 you may be disqualified altogether; the one exception to this is those on the guarantee credit element of pension credit. 

Although the focus of this article is mainly about the impact of lump sums, it is worth remembering that if your regularly weekly pension has been increased this could also result in a reduction in your regular help from pension credit and other benefits.

Care fees: Lump sums will affect help you get as things stand

Means-tests also apply in other areas, notably when it comes to paying for social care.

The rules are different in different parts of the UK, but the amount of help you can get with care costs is generally affected by how much you have in savings.

For example, in England and Northern Ireland you will get less help if you have savings over £14,250 and you may get no help if you are over £23,250.

More details, including the rules for the rest of the UK, are here. 

We have already heard from a reader on behalf of an elderly relative who is now likely to get less support with care costs because they have received a state pension lump sum.

Losing out twice? What will happen now

Many people will feel that it is unfair that they have lost out twice. First, they were underpaid on their state pension, sometimes for many years.

Second, they may now lose out on means-tested benefits because their pension has been paid as a lump sum rather than each week.

Ideally, DWP would agree to ignore these lump sums when working out benefits, but we have so far seen no indication that they plan to do so.

What does the DWP say?

‘The action we are taking now will correct the historical underpayments that have been made by successive governments and anyone impacted will be contacted by us to ensure they receive all that they are owed,’ said a spokesperson for the DWP.

It previously told us: ‘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.’

It added that married women who are already getting a state pension are required to make a separate claim to have it increased if their husband reached state pension age before 17 March 2008.

A claim is not needed if their husband reached state pension age from 17 March 2008 onwards.

The DWP encourages anyone who thinks they have failed to claim a state pension increase they are eligible for to contact the department.

Read the DWP’s full statement on underpaid state pension here.