Pension flexibility and Benefit entitlement
As of April 2015, if you are aged 55 or over you will have more flexibility about what you do with your Defined Contribution pension. This is where you build up a pot of money rather than the right to a pension. Your options are:
- Do nothing and defer the pension
- Take the whole amount as a lump sum
- Take a number of lump sums
- Arrange ‘Flexible drawdowns’ where lump sums or regular payments can be drawn down
- Buy an annuity
The DWP have released information about how your income related benefits can be affected by your pension and any money you take from it. The benefits affected are:
- Employment and Support Allowance (income related)
- Housing Benefit
- Income Support
- Jobseekers Allowance (income based)
- Pension Credit
- Universal Credit
It will depend on whether you or your partner have reached qualifying age for pension credit as to how your (or your partners) pension pot is treated. You can find out your qualifying age by using the GOV.UK state pension calculator on their website.
The way in which your future benefits could be affected is explained further;
If you or your partner are under qualifying age for pension credit
If you or your partner are under the age of qualifying for pension credit and you do not take any money from your pension pot, then it will not be taken into account when your benefit entitlement is worked out. If you or your partner do take money from your pension pot then it will be treated as either income or capital depending on the way it is paid to you
If you or your partner are over the qualifying age for pension credit
Once you have reached the qualifying age for pension credit then you are expected to use your funds to help support yourself. If you choose not to buy an annuity an amount of ‘Notional’ income will be taken into account when your benefits are worked out. The ‘Notional’ income is (in this case) an amount equivalent to the income you would have received if you had bought an annuity.
If you take a cash lump sum then this will be taken into account as capital.
If you spend, transfer or give away any money that you take from your pension pot, DWP will consider if they believe it was done so deliberately in order to secure (or increase) your benefits entitlement. If they decide it was done deliberately you will be treated as if you still have the money and it will be taken into account when your entitlement is worked out.
Pension income over a certain level can affect your entitlement to contributory benefits.
For Employment and Support Allowance (contribution based), half of your pension income over £85 per week will be taken into account.
For Jobseeker’s Allowance (contribution based), all of your pension income over £50 per week will be taken into account.
If you do not take your pension, it will not be taken into account when your entitlement to contributory benefits is worked out. Any cash lump sum you take that is deemed to be capital will not affect entitlement to a contributory benefit.
This factsheet provides widely expected news on the likely stance the DWP will take on means tested benefits and the affect of new pension freedoms. The fact that a pension deferred after pension credit age will now be assumed to have a notional income will ensure pensions are paid for the benefit of living in retirement with potential burden on the state eased. However how the pre pension credit age “depravation” rule will be policed remains to be seen, though taking a pension and gifting to children to help them onto the property ladder may not be wise due to this. The purchase of a sports car and then a claim for benefits will also not go down too well on a claim form!
The main thing is to ensure that you have considered everything before making a decision to either take or defer your pension, your age at the time could have an effect on benefits. Take independent financial advice or utilise the new pensionwise guidance service before making any pension or retirement decision