Steve Webb, the pensions minister, said that those receiving British pensions overseas include many foreign citizens who have “never set foot in Britain at all”.
The pensions can be worth £3,500 a year for the entire length of a person’s retirement, and are costing taxpayers £410 million a year — a rise of more than a third over the past decade.
Mr Webb revealed the figures ahead of this week’s Queen’s Speech, which will include a proposed law that will stop new claims for such pensions.
The situation arises because of rules that allow spouses to claim a “married person’s allowance” based on their husband or wife’s history of National Insurance contributions. The working spouse can receive their state entitlement too.
While claims for a “married person’s pension” are falling in the UK, the number of such pensions paid to people abroad has risen steadily.
There are 220,000 people living outside the UK who receive some sort of state pension based solely on their spouse’s British work history. That is unacceptable, the minister said.
He said: “Most people would think, you pay National Insurance, you get a pension. But folk who have never been here but happen to be married to someone who has are getting pensions.”
Mr Webb also warned that many middle-class workers are not saving enough for retirement and face a steep drop in their living standards after they stop work. In response, he said, employees should sign up to “automatic escalation” deals where they commit money from future pay rises to their pensions.
Mr Webb spoke to The Daily Telegraph as the Coalition prepares to publish the Pensions Bill in the Queen’s Speech.
The Pensions Bill will create a new flat-rate state pension of about £7,000 a year for everyone in Britain who spends at least 35 years working or caring for children or the elderly. The new pension system, in place from 2016, will do away with several aspects of the current regime, including rules allowing people to claim a pension based on their spouse’s history.
The new flat-rate pension “is for individuals, it’s not based on your spouse, it’s just for you”, Mr Webb said. Existing pensions will be unaffected, but the change will prevent new claims for pensions that cannot be justified, he said.
“Women married to British men, we are getting more of them claiming a pension based on his record. In some cases, they have never set foot in Britain at all.
“There are women who have never been to Britain claiming on their husband’s record. There are also men who have never been to Britain claiming on their wife’s record.”
He added: “Say you are an American man and you marry a British woman, you can claim, if she has a full record of contributions, a pension of £3,500 a year for your entire retirement having never paid a penny in National Insurance.
“Most people would think that is not what National Insurance is for.”
The new single-tier state pension introduced this week will be the centrepiece of the Coalition’s pension reform, accompanied by the new auto-enrolment scheme that automatically saves a sum from low-paid workers’ wages into a retirement fund.
Mr Webb said that those two reforms will ensure that people on low and average wages will be able to maintain their standard of living in retirement. But high earners will need to save more or work for longer to avoid a sharp fall in their incomes after they stop work.
“If you are on a modest wage, a £7,000 state pension and an auto-enrolment pension gets you not far short of your current income. It’s not a cliff edge. But if you are on above average earnings and you want to maintain your living standards, you need to do more.”
He added: “In terms of saving more, most people probably know that they are not putting much by.”
Mr Webb said that ministers will encourage more employers to offer their staff “automatic escalation” deals that earmark future pay rises for pension contributions. “No one wants to put in extra cash now, but people are willing to say, next time I have a pay rise, I commit now that part of it will go into the pension,” he said. Evidence from the US and other countries suggests that such schemes “work pretty well,” he said.
The new flat-rate pension will mean that many higher earners will receive a lower state pension than they would have done under the current rules.
Mr Webb admitted that the new scheme would be less beneficial to higher earners. However, he insisted that such people would still have better retirement incomes than the lower-paid because of their occupational pensions.
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