IHTM17600 | State Pension underpayments

State Pension underpayments

In 2020 the Department of Work and Pensions (DWP) became aware that some people had not been paid additional State Pension payments to which they were entitled. A full review was started to identify those affected and to correct the underpayment. There were a number of different situations which resulted in the entitlement to additional payments.

Category BL, Widowed Pensioners, and Category D payments

Category BL – This is where an individual had insufficient National Insurance (NI) contributions themselves to qualify for a basic State Pension of £82.45 a week (at April 2021 rates), they may have been entitled to an uplift in their pension based on their spouse or civil partner’s NI contributions.

Widowed Pensioners – Where a person is not entitled to the full basic State Pension in their own right, they can inherit a basic State Pension from their late spouse or civil partner up to the full basic State Pension.

Category D - People who reach age 80 and are getting no basic State Pension or a low basic State Pension, may be able to increase their State Pension from age 80.

In October 2020 DWP announced that a programme was starting to identify those affected by the Category BL, missed conversion, and Category D errors and to pay them the arrears due.

Home Responsibilities Protection

A subsequent review in DWP in 2021/2022 identified a further issue where some people had not received enhanced State Pensions.

Home Responsibilities Protection (HRP) was a scheme that ran between 6 April 1978 and 5 April 2010 which reduced the number of qualifying years of NI contributions a person with caring responsibilities needed to receive the full basic State Pension.

A review identified that, because NI numbers were not always recorded when people claimed Child Benefit before 2000, their NI record was not updated as it should have been and therefore their State Pension may have been underpaid.

Inheritance Tax issues

It is possible that the person who has been underpaid their State Pension will have died before DWP make a payment of the arrears. The correct IHT treatment is set out below.

If a person dies having received a payment of arrears, the payment will simply be reflected in their estate and IHT will arise on the estate as usual.

When arrears are paid after the person’s death, but where DWP had not notified the person that any payment of arrears was due, then there is no value to be included in their estate.

When arrears are paid after the person’s death, but while the person was still alive DWP had notified the person that they were entitled to a payment of arrears, then the right to the arrears was a valuable asset of the estate at the date of death. In these circumstances a discount of 5% of the value eventually received can be allowed to reflect the fact that the payment had not been made before the date of death.