If someone spends their pension pot the government can treat them as if they still have it when when calculating entitlement to benefits, reducing their recourse to the state in the event of poor decision making post-April, the Department for Work and Pensions has clarified.
In a factsheet on the interaction of pension freedoms and means-tested benefits, the DWP explained that if people “spend, transfer or give away any money taken from a pension pot”, the they will have “deliberately deprived themselves of that money” to secure or increase benefits.
If it is decided that they have deliberately deprived themselves, they will be treated as still having that money and it will be taken into account as income or capital when benefit entitlements are worked out.
In general, the document states that how someone uses their pension pot or their partner’s pot is treated differently depending on whether they have reached the qualifying age for pension credit.
The document stated that if they are under the qualifying age for pension credit and no money is taken from the pension pot, then it will not be taken into account when benefit entitlements are worked out.
If an individual does take money from their pension pot, it will be treated as either income or capital depending on how regularly they make withdrawals. Those over the qualifying age for pension credit are expected to use pension to help support themselves.
If an individual chooses not to buy an annuity after reaching the qualifying age for pension credit, an amount of ‘notional’ income equivalent to the income the person would have received will be taken into account when benefits are worked out.
If an income is taken from the pension pot, the amount which will be taken into account when assessing benefits will be the higher of the actual income or notional income. If they take a cash lump sum, this will be taken into account as capital.
Pension income over a certain level can also affect entitlement to contributory benefits:
• for employment and support allowance (contribution based), half of pension income over £85 per week will be taken into account, and
• for jobseeker’s allowance (contribution based), all pension income over £50 per week will be taken into account.
If a pension is not drawn, it will not be taken into account when entitlement to contributory benefits is worked out. Any cash lump sum taken that is deemed to be capital will not affect entitlement to a contributory benefit.
Andrew Tully, pensions technical director at MGM Advantage, said that the DWP could not be any clearer in how they will treat cases where people have either deliberately or unwittingly spent their pension pots and intend to fall back on means-tested state benefits.
“We have a duty as an industry to make it very clear what the consequences of this are. But all of the responsibility rests with the individual to tell DWP and the local authority when they take money from a pension.”
He added that people need to pause before raiding their pensions next month, ensuring they fully understand what the potential long-term consequences of doing so are.
peter.walker@ft.com
