Millions could lose out with complex new pensions

From tomorrow, more than 5 million pensioners can register to claim the new pension credit, which comes into existence on 6 October. People aged 65 or over will be eligible for up to £14.79 extra a week if they are single and up to £19.20 extra if they cohabit or are married. The aim is to reward people who have modest pensions and savings on top of the basic state pension.

A Department of Work and Pensions leaflet Pension Credit explains the basic details and an information line (0800 99 1234)starts tomorrow. You are likely to be entitled to pension credit if your weekly income is less than £139.10 if you are single or £203.80 if you have a partner. Others may also qualify if their incomes are higher; the severely disabled, their carers and people with certain housing costs including mortgage interest payments.

People already receiving the minimum income guarantee (MIG) do not need to take action since they will automatically be transferred to the new system, but others will need to make a claim - and many organisations are worried that large numbers of people will lose out.

Nearly a quarter of pensioners eligible for MIG do not claim it. Extrapolating from this, Neil Duncan-Jordan of the National Pensioners Convention is worried about the pension credit: 'We could be talking of 1.5 million pensioners not getting what they are entitled to.'

As with many other parts of the benefits system, the pension credit structure is rather confusing. There are two parts. From October, the term MIG will drop out of the official jargon and be known as the 'guarantee credit' part of pension credit. So, at the new MIG rates, which start today to mark the new fiscal year, single pensioners aged 60 or older would be guaranteed a weekly income of £102.10. Each couple would receive £155.80. The new element - the savings credit part- is an additional amount on top (see box).

The Government has been attacked for the complexity of the new system and for extending means-testing to half the pensioner population. Organisations such as the Association of British Insurers, the National Association of Pension Funds and actuary Watson Wyatt are in favour of dispensing with means-testing, most obvi ously done through a higher basic state pension.

Anyone good at figures will see that while the position of pensioners with modest savings is improved by the pension credit, it is not ideal. They get an extra top-up to reward them for saving, but the saving element is not a strong incentive to younger people to build up pensions. Many people who receive the saving element will only be slightly better off - especially when council and housing tax benefit are taken into account - than if they had spent their money instead.

Saving graces

Balbir and Manju (a couple in the pension credit
leaflet) each have the full basic state pension of
?77.45, plus a ?12-a-week pension for Balbir,
making their joint income so far ?166.90. They
also have savings of ?8,000. The first ?6,000 is
excluded and the remaining ?2,000 is assumed to
generate income at just over 10 per cent a year -
?4 a week. So their total income, including the
notional savings income, is ?170.90.

They are entitled to another ?13.16 through the
pension credit. (The leaflet does not explain the
calculation, but Balbir and Manju receive the
maximum top-up for couples of ?19.20, reduced
by 40 per cent of the difference between their
total income -?170.90 - and ?155.80, the
MIG/guarantee level for couples.)

In the Age Concern book Your Rights 2003-04,
Sally West gives an example where the
calculations are different as the claimant has total
income of less than the MIG/ guarantee element
of pension credit. Rose has the full basic state
pension of ?77.45 and a private pension of ?10,
making her total income ?87.45. She gets pension
credit of ?14.65, a guarantee credit element of
?14.65 (?102.10 less her income of ?87.45) and a
savings credit element of 60 per cent of the
difference between the full basic state pension
level of ?77.45 and her income of ?87.45. This
gives her another ?6. So her income including the
pension credit will be ?108.10.