Many thousands of pensioners are failing to claim their entitlements to pension credits, which could currently cost them over £30 per week in lost state pension benefits.

The situation has been highlighted by the Government, as pensions minister Steve Web has begun a pilot scheme using HMRC data to identify and contact pensioners entitled to pensions credit, but who were unaware or simply not taking it up.

The pilot scheme will focus on 2,000 randomly chosen pensioners, in an effort to improve awareness and uptake of pension credits alongside the basic state pension, and to improve pensioners’ overall pension income. Given that the focus group of 2,000 is just a sample of those failing to claim their full state pension entitlements, the clear implication is that the total number of pensioners currently losing out on part of their state pension entitlements could be much greater.

At present the basic state pension is £97.65 for a single person, but if that person has less than £10,000 in savings or other income they may be eligible for pension credits that could top this up to a maximum of £132.60. For over-65s there is an additional pensions credit payment of £20.52 for a single person, and £27.09 for a couple.

Eligibility for pension credits is established by means-testing, and it has long been suggested that many pensioners fail to take up their full state pension credits because they are simply uncomfortable with the prospect of having to admit they are in need.

In the longer term, the pension credits system may eventually be abolished if the government goes ahead with plans for a higher, flat-rate basic state pension of £140 a week for all.

Unclaimed pension credits currently account for over half  of all unclaimed benefits for pensioners.

The rise in the general state pension age to 66 by 2020 could cost today’s over-50′s up to £14,000 in lost pension income, according to figures from the Department for Work and Pensions (DWP).

The lost income consists of payments of the basic state pension that will be lost during the extra time working.

This will be increased by the pension savers’ inability to save enough to keep their pension income at the same level as it would have been, without the changes.

As the state pension age rises, some 4.5 million men and women will be forced to work a year longer than they previously would have.

The figures have provoked a critical response from industry experts, who claim that the workers worst affected could lose 9% of the total pension they could previously have expected to receive.

Women in particular will be adversely affected by the changes, according to Ros Altmann, a former government pensions adviser and now spokesperson for the over-50s group Saga.

“These changes are dramatically unfair and completely unacceptable. They penalise at least half a million women, making them wait an extra two years for the state pension, and even the Government itself admits they will not have time to prepare ….. a rethink is essential,” Ms. Altmann said.

The report has highlighted again the need for pension planning and good pension advice for all those affected by the ongoing review of workplace pensions in both the public and the private sector.

New proposals from the government may provide a general pension income of £140 per week for all pensioners, and eliminate the current ‘top-up’ system whereby pension credits are added to the basic state pension for poorer pensioners.

Currently (2010/11), pensioners receive basic state pension income of £97.65 per week for a single or £156.16 for a couple. For those with little or no other income, this may be topped up by means-tested pension credits to £132.60 for a single or £202.40 for a couple.

The new system would provide a basic state pension of £140 a week per pensioner, whether single or in a couple, eliminating the need for means testing and the administrative costs which it entails.

The new plan is to be laid out in a Green Paper later in the year and, if approved, could be implemented by 2015.

While government claims that the new system is generous, it must be remembered that the reform is working from a very low base, in terms of state pension income. The EU agency Eurostat defines poverty as having an income less than 60% of the national average wage. This currently applies to 30% of Britain’s pensioners, putting Britain on the same level for pensioner poverty as Lithuania, and second-worst in the EU, with only Cyprus having a lower state pension income.

The average basic state pension income for the EU is equal to 60% of the national wage, according to Eurostat.

For those not contributing to a company pension, making private provisions for retirement, by setting up personal pensions, has never been more urgent.

Pensioner couples now take a quarter of their pension income from work in retirement, according to new data published this week by the Office for National Statistics (ONS).

In 2009, the average pensioner couple had a joint weekly income of £564, equivalent to £29,000 a year.  The general increase in income of retired households means that they are enjoying a better average pension income than in previous years, although research has shown that many continue to work out of financial necessity, and have sacrificed their dream of retirement, because their private pension savings have failed to deliver the lifestyle they had planned for, after work.

Pensioners now make up just 38% of the poorest fifth of all UK households, showing a marked improvement from the level of 56% in 1977.

The ONS has analysed the sources of pension income for retired couples, and found that while 25% comes from private pensions and company pensions, 35% came from state pensions , and 25% from earnings from continuing work.

At the lower end of the scale, however, the ONS has pointed out that over half of single pensioners receive less than £10,000 per year in total  pension income, and that the poorest 20% of pensioners get by on less than £197 per week.

In its previous-year data for 2008, the ONS showed that 31% of pensioners depended on the Basic State Pension and pension credits as their sole pension income.

EU statistics have recently shown that the UK basic state pension is the lowest state pension in Europe, at  just 30.8% of average working pay, compared with an EU average of 60%.

There will be over 800,000 people turning 65 during 2012, compared with 650,000 in 2011, putting an incredible strain on government spending on the basic state pension, according to the Department of Work & Pensions.

The strain on the government’s pensions budget emphasises the need for consumers with no pension today to secure their retirement income with a private or personal pension.

The ballooning number of so-called ‘baby boomers’ hearks back to the post-war exuberance of the years 1946-47, although the first baby boomers were women able to draw their basic state pensions at age 60 in 2005/06. Government spending on the state pension system has risen by £14bn since 2006, and the new clutch of baby boomers coming online over the next 2 years is expected to add another £4bn or 28.5% to an already enormous state pensions budget.

The emerging problem of over-reliance on government pensions is likely to be particularly apparent as the baby boomers come to the end of their working lives in increasing numbers. Aviva has pointed out recently that this generation lived through a golden era of final salary pensions and rising property prices, which can no longer be taken for granted, but may have inhibited their propensity to make provisions for private pensions income and given people exaggerated hopes for their retirement lifestyles.

The result is likely to be a generation less well prepared for retirement, and more reliant on the basic state pension than they expected to be,  Aviva said.

AXA wealth has predicted that the retirement income of the late 1940s generation could fall short of their expectations by as much as £5,000 per year.

Latest government proposals to link private pension income to the Consumer Prices Index will increase the negative effects of inflation on pensions, says Mallowstreet, a leading panel of pension industry experts.

Previous proposals had been to link both state and personal pension incomes to the Retail Prices Index (RPI), which generally rises faster than the Consumer Prices Index (CPI) and therefore provides a better safeguard against inflation. In recent years, the CPI has generally risen 0.7% per year less than the RPI.

In the next 5 years the gap between the two indexes is expected to be higher, and 1.2%, according to calculations by the Office for Budget Responsibility.

The CPI link was first proposed for state pensions, but the Department for Work and Pensions has claimed that it is appropriate and consistent to take the same approach for private pensions. 

Because pensions are a long-term investment, the differences in the rates are magnified over time. Mallowstreet estimates that pension incomes linked to the CPI could be worth up to 25% less than pension incomes from private pensions linked to the RPI.

The Government now proposes to use the CPI as the index for linking increases in the basic state pension, state benefits, and large public sector pension schemes. This will lead to huge savings in the Government’s pension costs, it will considerably deplete pension savings and pension income from pension schemes.

Mallowstreet has now written to the government asking for a full consultation period, before the proposed changes go ahead.

A 60-year old person retiring now faces annual pension income that will be £3,000 less than it was 2 years ago, according to pensions consultancy Aon Corporation.

Aon bases its calculations on its proprietary Aon DC Pension Index, which tracks the value of pension income from private pensions for an individual contributing 10% of a £25,000 salary into a defined contribution pension scheme. Aon makes projections for pension income for various individuals including a 30-year-old, a 60 year old and a 65 year old as samples from the Pension Index.

Aon’s latest snapshot for July 16 2010 shows that a 60 year old transforming £150,000 of pension savings into a pension income by purchasing a pensions annuity would have received £13,932 in 2008, but would receive just £10,824 today, a fall of £3,108 over 2 years.

For a 65 year old, the projected pension income from pensions savings of £150,000 would have fared even less well during the ‘red valley of tears’ in the latter half of the past decade. His or her income from their pensions annuity would have fallen from £10,327 in 2008 to just £7,925 today.

Aon’s latest figures show the importance of pension planning and taking good pensions advice, before choosing when to retire.

Aon also pointed out that Government hopes to achieve savings in the cost of the basic state pension, by raising the state pension age by 1 year, may be miscalculated. The fact that life expectancy is also expected to increase by 1 year between 2010 and 2016 will mean that those in retirement will not be taking their pension income from the basic state pension for 1 year less, as the Government expects, but for the same number of years as before.

The Government has changed its mind again on planned changes to the age for taking the basic state pension.

Work and Pensions Secretary Iain Duncan Smith has said that the age could now be raised to 68, and sooner rather than later, in a newspaper interview this week. A more exact timing for the intended change was not given.

For the Government, a deferment of one year in the age for the basic state pension would add 1% to GDP, he claimed.

Mr. Duncan Smith also suggested that the age for taking the basic state pension could be indexed to change with increases in life expectancy, as already happens in Denmark.

For some time, the Government has been planning a more rapid increase in the age for taking the basic state pension, compared with the schedule of the previous Labour Government. Labour had envisaged taking the age for the basic state pension to 66 by the year 2024 and to 68 by 2046, reflecting new data on longevity which shows that we are now expected to live into our 80s.

A Government source was quoted in ‘The Times’ newspaper within the past month as saying that the state pension age would now rise by 1 year every 5 years, until the age for taking the basic state pension reached 70 around the year 2035. This would have meant that a person aged 45 today would have been the first person unable to draw their basic state pension until they reached 70. That proposal would now seem to have been superceded, given the words of Iain Duncan Smith.

The Government’s constantly changing thinking on the entire pensions area has left even the Revenue (HMRC) admitting that they have difficulty keeping up. Pensions experts have described the Government’s numerous proposals and counter-proposals over the past year as ‘tinkering’ around the edges of the pensions system.

In addition to the basic state pension, Government has suggested it may also review the role of the National Employment Savings Trust (NEST), to change the scope of the scheme. The NEST scheme was planned to provide a pensions income through company pensions schemes to all who did not actively opt out of the scheme. However, pensions minister Steve Webb has pointed to the huge administrative cost to employers of meeting the requirements of the NEST scheme, and suggested that utilising existing infrastructures to provide a more generous basic state pension could be a more reasonable option.

A minimum sustainable pensions income for a retired couple would be £222.22 per week, excluding rent, according to the JRF.

The actual pensions income from the Basic State Pension with pension credits is currently £202.40 for a couple. This includes the full pension credits entitlement of £46.25, which may not be available in every case. The reality is that he pensions income for many pensioner couples, taking their entire pension income from the state, could be considerably less. The news highlights the need for today’s workers to ensure adequate pension planning that will provide them with an independent income in retirement.

For a single person the minimum income standard is £175.34 per week, according to the JRF report. Again, the state pension falls significantly short, coming in at £97.65 per week with a potential means-tested pension credit of £34.95, giving a maximum of £132.60.

The figures are calculated to reflect a pensions income that is sufficient ‘not just to survive, but to take part in society’, according to Julia Unwin, chief executive of the JRF.

The problem is not related solely to those already in retirement. The JRF also claimed that the recent increase of £1,000 in tax allowances may be of no real benefit to working families. Although the cuts could, on the face of it, make a working family £320 a year better off, that benefit could be eaten up by other budget changes such as cuts in tax credits, the freezing of child benefit, the rise in VAT, and the cap on housing benefit.

“A single person who a decade ago had just enough to get by, and whose income has risen in line with official inflation, cannot afford a minimum budget today,” said Donald Hirsch of Loughborough University, co-author of the Joseph Rowntree Foundation report.

Other minimum weekly incomes excluding rent costs were £402.83 for a couple with 2 children, and £233.73 for a single parent with one child.

The report interviewed a broad cross-secton of the public to gauge thinking on living standards, and includes information gathered from focus groups to set a benchmark for what constitutes an acceptable standard of living.

This means that nearly a third of UK pensioners retire with no substantial savings or personal pension income, according to the Office for National Statistics, which this month has published new figures, showing a snapshot of the year 2007-08.

Pension income for those pensioners is currently £132.60 per week for a single person or £202.40 for a couple, including pension credits at the full rate. The single person’s pension income here consists of the Basic State Pension of £97.65 plus pension credits of £34.95, while the couple’s pensions income includes Basic State Pension of £156.15 plus pension credits of £46.25.

Workers have been urged by pensions experts to take more control over their pension planning, considering the likely effects on pension income of market trends and budget cuts in the coming years. The current overhaul of pension rules has left even the Revenue Commissioners HMRC in some confusion, and some pensions providers have said that the Revenue is struggling to deal with the many changes contained in new pension rules. The ongoing pensions review also raises questions as to whether it is wise to rely on the Basic State Pension, for your pension income, if your retirement is still several decades away.

A recent report from Sun Life claimed that the UK is gradually shifting responsibility for your own pension income from the state and private sector to the individual.

As a state, the UK is now Europe’s leading ‘pensions miser’, with the lowest state pension income in Europe, compared to average working pay. The pension income from the Basic State Pension is now just 30.8% of average working pay, compared with an EU average of 60% and far behind the generous levels offered in Spain (81.2%), the Netherlands (81.9%), and Luxembourg (88.3%).

In the private sector, 90% of the generous defined benefit or final salary pension schemes are now closed to new members, again placing the onus on the individual to make provision for his own pension income.