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13 June 2012updated 03 Aug 2021 3:05pm

Revealed: why Labour’s Waspi policy won’t benefit poorer pensioners

By Chaminda Jayanetti

Labour’s policy to compensate older women for changes to the state pension age will benefit the poorest pensioners far less than richer ones — and may not benefit them at all.

In a dramatic post-manifesto announcement, the party committed £58bn in compensation to women born between 1950 and 1960 for the impact of the 1995 Pensions Act, which raised the female state pension age from 60 to 65 — it has since been raised again, to 66 — a policy that affects 2.6 million women in the UK. The commitment was welcomed by “Waspi” (Women Against State Pension Inequality) campaigners, who argue they were given inadequate notice of the pension age changes and were in some cases left destitute. The pledge has also reportedly been well received on the doorstep during the election campaign.

However, Labour confirmed for this report that the compensation payouts will be treated as state pension income for tax and benefits purposes. This means that women born in the 1950s who currently receive benefits such as pension credit will have them cut in response to their compensation payouts — leaving them little or no better off as a result. Meanwhile, higher-income women will have their compensation subjected to income tax, but will still gain substantially.

Tom Waters, a research economist at the Institute for Fiscal Studies, says that “women who would benefit from this policy are less likely to be towards the bottom of the income distribution — about 16 per cent of them are in the bottom fifth — and they’re more likely to be around the middle.

“And for those of them who are on lower incomes, quite a few of them might see some or even all of the gain that they get from this policy withdrawn through lower entitlements to pension credit.”

Under Labour’s plans, women born in the 1950s would receive around £15,000 in compensation on average, with the highest payouts reaching £31,000. Labour would split the compensation into five annual payments, which “will be treated in the same way that the missed state pension income would have been treated for tax and benefit purposes,” according to a party statement.

When benefit claimants’ income rises, their benefit payments usually fall in response, to reflect their reduced need for welfare support. Some benefits are withdrawn pound-for-pound — for every pound of higher income, a pound is withdrawn from benefit payments. Pension credit, which is paid to poorer pensioners, is one such benefit. It guarantees claimants a specified minimum income — if someone’s pension and other income is below a certain amount, pension credit tops it up to that level. If their pension income rises, the top-up falls pound-for-pound, as less of it is needed to reach the guaranteed level.

As a result, 1950s-born women on pension credit will find their benefit cut by a pound for every pound in Waspi compensation they receive, until they reach the guaranteed amount. The impact could be worst for low-income women born between 1950 and 1953. Some receive a basic state pension of £6,718 a year. For those living alone with low incomes and savings, pension credit tops this up to at least £8,697 — a benefit payment of £1,979.

As a result, if their annual Waspi compensation is below £1,979, it will be entirely cancelled out by withdrawn pension credit, meaning they gain nothing from it. If their Waspi compensation is above £1,979, they will gain financially, but also lose entitlement to pension credit and the numerous other benefits that come with it, including maximum housing benefit and council tax benefit, cold weather payments and warm home discounts.

The impact could be heaviest on those with disabilities. The severe disability premium raises the pension credit guaranteed income level to £12,121 — well above the basic state pension. This makes it likelier that their entire Waspi compensation will be cancelled out by withdrawn pension credit.

Theresa May, who was born in 1956, will do well out of Labour’s proposals. Severely disabled pensioners on low incomes may gain nothing at all.

“Once they get into retirement, if they’re receiving [Waspi compensation] every year for five years, that would to some degree wipe out eligibility for means-tested benefits,” says Daniela Silcock, head of policy research at the Pensions Policy Institute.

Under Labour’s plans, women born in the late 1950s will start receiving compensation before they reach the state pension age. Those on Universal Credit are therefore also likely to have their benefit withdrawn pound-for-pound in response to the compensation payouts — although if their raised income renders them ineligible for Universal Credit, they will be released from the troubled benefit’s jobsearch requirements and sanctions regime.

Labour rejects the claim that its policy is regressive, as the payments will be subject to progressive income tax rates. Nor is the policy necessarily intended to be redistributive; Labour hasn’t proposed raising pension credit in its manifesto either. However, because its £58bn estimated cost does not factor in the money recouped in taxation and withdrawn benefits, Labour could protect recipients from having their benefits withdrawn without having to go over the £58bn figure.

“I would imagine that they’ve come up with this policy and are trying to think of ways it could work,” said Silcock. “Once they actually sit down and look at the details they might think that another way would be better.”

A Labour Party spokesperson said: “Redressing the historic wrong of women having their pensions stolen by the Conservatives and Liberal Democrats is the right thing to do.”

Chaminda Jayanetti is a freelance journalist who has written for the Guardian, the Observer and Private Eye

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