Pension Freedom and how it might affect entitlement to State benefits.
From April 6th 2015 when the new pension flexibilities – what we call Pension Freedom – came into effect, it meant that if you are aged 55 or older, you will have more flexibility about what you can do with your “defined contribution” pension. Until Pension Freedom came along, most people tended to buy an annuity or opt for income drawdown when they retired. Under Pension Freedom, the choice is much wider, and might include:
– Taking the whole amount out as one lump sum
– Taking a number of smaller lump sums out over time
– Arranging flexible drawdowns, where lump sums or regular payments can be drawn down
– Buying an annuity
However, although this legislation has come to be known as Pension Freedom, as is always the case with pensions, there are (less well known) rules around how your pension and any money taken from it, will be treated in the calculation of your entitlement to income-related state benefits.
What State Benefits are Affected?
The following state benefits are affected:
– Employment and Support Allowance (income-related)
– Housing Benefit
– Income Support
– Jobseeker’s Allowance (income-based)
– Pension Credit
– Universal Credit
So rather than Pension Freedom meaning what the popular press has implied, i.e. that you can do whatever you want to with your pension pot without penalty, the reality is more complex, as the way in which you use the new pension flexibilities could affect any future entitlement to the benefits listed above.
Click here for more information on this topic from the Department of Work and Pensions, but suffice it to say here that if you take money from your pension pot, then how that money is taken into account when your benefit entitlement is worked out by the DWP, depends on whether you (or your partner) are under or over the qualifying age for Pension Credit.
Of course, this means some knowledge of what Pension Credit is required, and as the DWP says, it is your responsibility to tell them if you or your partner take any money out of your pension pot.
And there’s more:
The Deprivation Rule says that if DWP decides that if you have deliberately spent, transferred or given away money that you have taken out of your pension pot in order to secure (or increase) your entitlement to benefits, then you will be treated as still having that money, and it will be taken into account as income or capital when your benefit entitlement is worked out.
When it comes to Contributory Benefits, pension income over a certain level can affect your entitlement to these benefits. Of course, if you do not take your pension out, it will not be taken into account when it comes to working out your entitlement to contributory benefits. Likwise, if a cash lump sum is deemed to be capital rather than income, it will not affect entitlement to a contributory benefit.
So, as can be seen, there is greater complexity to Pension Freedom than might first have been thought, especially in this specific area of how it might affect entitlement to state benefits.
If you need help, advice and clarification on Pension Freedom, then call us on 0121 690 0390 or contact us.