Dipping into pension could cost savers their benefits

The paper said: "Individuals currently getting help with their Council Tax and considering taking money out of their pension will need to find out from their local authority how this might affect the amount of help that they get.

"Pension schemes, pension providers and official guidance bodies such as Pension Wise or the Money and Pension Service are very unlikely to be able to supply up-to-date information that is accurate at the local authority level."

Webb said while this would not be an issue for people who’ve never worked or saved much, as they won’t have pension pots to worry about, it would be a worry for people who have "worked and saved but now find themselves out of work in later life, and might reasonably think that using pension freedoms to tap into their pension is a sensible way of keeping their finances together".

He warned: "The research might be particularly topical if a combination of £20 coming off universal credit rates, and the end of furlough, means a lot more people turning to their pensions for cash.

"It would be pretty grim if no-one told them that by dipping into their pension they could actually wipe out the help they get with the council tax or even their entire universal credit."

As part of the government's financial response to the Covid-19 pandemic, a temporary £20 increase to universal credit payments was introduced.

Although this top-up scheme ends on October 6, some people could feel the pinch in their pockets at the end of September, depending on the day they usually receive universal credit.

But people cannot keep their pension untouched while claiming benefits. The paper also warned: "Pensioners cannot sit on large sums of untouched pension whilst claiming large amount in mean-tested benefits.

"Even if a pension pot remains untouched, those who claim benefits are treated *as if* they had used the pension to purchase an annuity or income for life.

"This ‘imputed’ income is then treated in the same way as any other private pension income."

Coinciding with the launch of the paper, LCP and EngageSmarter have launched a website called This is a free benefit checking calculator that will help raise awareness of the possible knock-on effects on benefit entitlement of taking money from your pension.