Pension credit loophole exposed

By Sarah Toyne
BBC News Online personal finance reporter

Unexpected inheritance windfalls may not affect payment

A pensioner who wins the lottery or inherits an unexpected fortune could continue to claim the government's new flagship benefit.

Under the Pension Credit rules, most pensioners could receive an unexpected inheritance or pocket a lottery win without it affecting their Pension Credit payments for up to five years.

They will not lose their credit or be required to repay the money back, because they could not have predicted their good fortune when they originally claimed the credit.

As most pensioners will have their claims reassessed every five years, any increase in savings or investments for these pensioners will not affect payments during that time.

"There will be some people who will do quite well out of the system," said Sally West, policy officer at Age Concern.

Means testing

The new Pension Credit starts in October 2003, and will guarantee a minimum income of £102.10 for a single pensioner and £155.80 for a couple and is expected to benefit 3 million pensioner households by 2006.

The government said on Monday that most pensioners applying for the credit will have their income reassessed every five years - the "assessed income period".

If they are given an assessed income period they will not need to tell the government if their pension, savings or investments increase in value during this time, although they may have to inform it of other circumstances, such as a change in living arrangements.

The anomaly has arisen because the government wants means testing to be less arduous for pensioners.

Pensioners who claim Minimum Income Guarantee (Mig) - the current system - must have their income assessed each week, and report very small changes in circumstances.

Changes in circumstance

When someone applies for the credit they will be asked if they expect their circumstances to change in the near future.

It is an inevitable consequence of trying to make a means tested system simpler Sally West, Age Concern

This allows the government to alter the award period according to someone's individual circumstances.

However, it can be very difficult to predict an inheritance and virtually impossible to expect a win on the lottery.

In practice, some people will have their income assessed regularly, but most people will have fixed awards or the "assessed income period" for up to five years.

Those claimants who have an assessed income period will not lose any credit if their income from savings or investment increases during that time.

People who have the maximum five year grace period are likely to be pensioners over 65.

There are always going to be exceptions to the rule Department for Work and Pensions

Younger pensioners or those with changing circumstances may not be given an assessed income period.

If they are not given an assessed income period, they must report many more changes to the government, including income from annuities, and personal or work-related pensions, such as stakeholders.

Ms West said: "If you have a system where people who don't have to report extra savings, those whose savings do increase during the period could be seen to do well from the system.

"It is an inevitable consequence of trying to make a means tested system simpler."

A spokesman for the Department for Work and Pensions said the system was a "cut in red tape and bureaucracy".

"There are always going to be exceptions to the rule," she said.

It recommends people who are concerned about a rise in expected income or change in circumstance to contact the Pension Credit office.