Steve Beasant

More than half-a-million pensioners are being ‘conned’ out of hundreds of pounds in benefits because the Government exaggerates the interest earned on their savings.

Ministers assume pensioners receive 10 per cent interest on their hard-earned nest-eggs when they calculate their pension credit, but they actually much less from their savings because the Bank of England base rate has plunged to 1.5 per cent.

It means a senior citizen who has tucked away £16,000 will lose £850 a year or about £16 a week, according to official figures uncovered by the Liberal Democrats.

It cannot be right that vulnerable elderly people are forced to dip into their savings to help pay for eating, heating, clothing and other everyday costs.

Some 550,000 retirees are being penalised by the method used by the Department for Work and Pensions to work out the handout, intended to top up pensioners’ income to at least £124 a week.

Under the scheme, anyone with savings over £6,000 – or £10,000 if they live in a care home – has the interest they receive deducted from pension credit payments.

The DWP assumes a ‘notional’ income of £1 a week for every £500 of saving – an interest rate of about 10 per cent.

But that rate is more than seven times the income paid even by the Government’s own national savings account, which pays 1.35 per cent after tax.

 According to the DWP’s calculations, a pensioner who has saved £16,000 would be assumed to earn £1,040 a year in interest.

But in reality they would only receive £216 at today’s rates – a shortfall of £824 a year.

Liberal Democrat Shadow Secretary of State for Works and Pensions, Steve Webb said: ‘Life is hard enough for savers without the Government making it harder by inventing interest rates that nobody could possibly hope to get.

  ‘Saving rates in the real world are plunging and yet the Government shows no sign of altering its own fantasy interest rates.

‘When people who have worked hard and saved hard apply for some financial-help they should be rewarded for saving, not penalised in this absurd way.’

Steve Webb believes the notional interest rate should reflect that set by the Bank of England.