My mum won £89k back after being underpaid state pension – then the taxman wanted a cut

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B01JWP Mature woman with Pension statement

A WOMAN aged 94 who was underpaid the state pension for years won back a whopping £89,000 after the error came to light.

But the taxman and council then chased her for a cut of the cash, her daughter has claimed.

Over 130,000 were not paid the correct state pension amount

The 63-year-old said her mother spent the last six months of her life unable to access the cash because HMRC had not yet collected tax on it.

And the local council also wanted share of the payment to cover care fees.

She told The Telegraph her mother was blocked from accessing money since September last year when she was given the payout.

The woman from Heysham, near Morecambe, Lancashire, who didn’t want to be named, said: “It has been appalling.

“It sounds like it would be absolutely marvellous to get all that money but you can’t spend it and everyone else wants a piece of it.”

Her mother was underpaid for 12 years, the Department for Work and Pensions (DWP) found.

On top of the £89,000 covering the previous years of underpayment her mother’s state pension payments were increased from £333 a month to £1,100.

A DWP spokesperson said: “We apologise for our error which meant she was underpaid her state pension.”

It’s just one of over hundreds of thousands of cases where errors in calculations have led to underpayments – in some cases worth thousands of pounds.

One divorced woman won back a £60,000 lump sum after missing out on the money for years. Another missed out on £128,000 over the years.

The DWP is working to identify those affected and give them the money they are owed.

But many of those getting payouts are being stung by a tax bill on top and other costs.

The woman, who had power of attorney over her mother’s finances, said that they could not access that cash until the tax was paid and that HM Revenue and Customs rang in the days leading up to her mother’s death and after asking for £6,900.

The local council also demanded a portion of the money, as the windfall meant the 94-year-old no longer qualified for support on her care fees, she said.

The state pension is taxable income and anyone receiving a payout after being underpaid could have to pay tax.

You’re taxed as if you received the money at the time, up to four years previously.

A large windfall of cash can also affect entitlement to other help, as well as care cost calculations.

For instance having a large amount of cash in the bank can affect entitlement to housing benefit and council tax support.

“Unfair” on elderly and vulnerable

Steve Webb, partner at consultants LCP who unearthed the pension underpayment problem said: “It is adding insult to injury to put new hurdles in the place of those who have been underpaid state pension for years or even decades. 

“The DWP should set out clearly for those who receive lump sums what this could mean for them in terms of tax or benefits, rather than turn people into detectives trying to track down the rules. 

“It would be particularly unfair for someone now particularly elderly and vulnerable to have their care funding package ripped up simply because they have received arrears of pension which would almost certainly have been spent by now if it had been paid on time.”

A report in September last year revealed 134,000 people, mostly women, were underpaid the state pension dating as far back as 1985.

It mostly affects those who first claimed the state pension before April 2016 who didn’t have a full national insurance record.

They should have received increases to the basic state pension but didn’t due to a DWP error that the National Audit Office (NAO) blamed on complex rules and outdates IT systems.

Together, around £1billion is owed with an average payout of around £9,000.

The DWP has started correcting the error and paying back the money owed to the women. It says it expects to make repayments by the end of 2023.

But further errors have since been uncovered, including those who previously paid a reduced rate of National Insurance Contributions, commonly known as the “married woman’s stamp”. 

How to check if you’ve been underpaid

The DWP has been contacting those affected by the errors, mostly women who are widowed, divorced or who have some of their entitlement based on their husband’s pension contributions.

But many people could still be missing out on significant sums because there is little guidance for those concerned they are being underpaid their state pension.

Those affected by the error identified by the DWP are pensioners who first claimed the state pension before April 2016 and did not have a full national insurance record.

Around 130,000 retired stay-at-home mums may have missed out on a pension hike when their husbands retired.

Their payments should have risen to 60% of their husband’s basic state pension, the amount women with low national insurance contributions got under the old pension system.

When the issue was first uncovered, they would get £80.45 a week, 60% of their husband’s £134.25 a week. Instead, they are getting more like £67 a week.

This error affects wives who retired before 2016. After this date women’s pensions were no longer linked to their husbands.

How much you could be owed will depend on when your husband retired.

If it was between April 2008 and 2016, you’ll get all your losses back.

Those whose husbands retired before 2008 had to apply for the extra cash, although in many cases they lost out because they didn’t know about it.

Women in this position can only get a year of backdated payments.

If you believe you may have been underpaid tax, you can use this online tool, which was launched by former pensions minister Steve Webb.

But if you are eligible, you should be sent a letter by the DWP confirming your payment.

Women who paid the married woman’s stamp at any point in the 35 years up to retirement should check if they are getting the right amount too.

They should contact the Pension Service to see if they are entitled to a higher pension.

The Pension Service can be reached using the gov.uk website or by calling 0800 731 0469.

The government recently revealed that there are further errors that could have left people underpaid their state pensions.

It detailed six new scenarios where the calculations were incorrect since 2007 – check them here.

Meanwhile the government has launched a new online tool for relatives of someone who has died and might have been underpaid the state pension.