Retirement planning: How does starting to take a private pension affect benefits?
I have a private pension with the Pru that was put on hold due to my being disabled and no longer able to work.
I’m now almost 60 and the pension is due to pay a small sum of approximately £31 per week, or I can wait until a later date.
I receive income support. Am I legally required to claim my private pension and must I inform the Department for Work and Pensions if I choose not to?
Would the pension be classed as a possible income even if I don’t claim it, and be deducted from my benefits?
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Steve Webb replies: When you claim a means-tested benefit such as income support, universal credit or pension credit, your entitlement is based both on your regular income and on how much you have by way of savings or capital.
Money held in a pension pot can be taken into account in some circumstances, which I will explain below, but DWP cannot force you to access your pension if you do not wish to do so.
The good news for you is that, until you reach state pension age, any money sitting untouched in a pension pot is ignored when your benefit is worked out.
Although you could in theory access the money from the age of 55, DWP take the view that this money is really meant for your retirement and so it would be wrong to assume you could use it to supplement your standard of living in your late 50s or early 60s.
Steve Webb: Find out how to ask the former Pensions Minister a question about your retirement savings in the box below
If, however, you chose to take money out of your pension pot, and then either keep it in a bank account or invested in an Isa or other investment, the DWP would take account of this as capital.
Different benefits have different rules for the amount of capital that you can have, but problems could start (for example in terms of help with council tax bills from English local authorities) as soon as you had just £6,000 in savings.
Once you reach state pension age, the situation would change.
Assuming that you moved on to pension credit at pension age, and assuming you still had untouched money in your pension pot, the DWP would then treat you as if you had spent your pension on buying an annuity – an income for life.
DWP would use a standard ‘annuity rate’ to do this calculation, so the figure they use could be slightly different to the figure your insurance company has quoted, but it shouldn’t differ by too much.
If you have a decent state pension, and DWP then added on a ‘notional’ annuity income, this could be enough to disqualify you from pension credit, even though your actual income was below pension credit levels.
It might be tempting to think that you could perhaps get the money out of your pension spent or given away so that you were then entitled to benefit, but you would need to be very careful about this.
If the DWP (or a local authority when it came to help with rent or council tax) thought you had deliberately deprived yourself of savings in order to qualify for benefits, they could treat you as if you still had the money.
There are no hard and fast rules about what uses for your pension would fall foul of the rules and what would be acceptable.
As a rough guide, decisions you would have made in any case (regardless of the benefit system) such as using savings to pay off debts or to undertake home improvements would probably be OK, but spending your savings on something apparently extravagant (such as a world cruise) with the deliberate intent of qualifying for benefit clearly would not.
To be clear however, for at least the next six years, until you reach state pension age, you need not worry about your ‘pot of money’ pension being taken into account when your benefit is worked out.
If you are able to leave it untouched and hopefully growing over that period, this will improve your chances of having a decent retirement.
In case it is useful, you can read more about how having money saved in pensions can affect your benefits by reading a paper on this topic here.
Ask Steve Webb a pension question
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Steve left the Department of Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock.
If you would like to ask Steve a question about pensions, please email him at email@example.com.
Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.
If Steve is unable to answer your question, you can also contact MoneyHelper, a Government-backed organisation which gives free assistance on pensions to the public. It can be found here and its number is 0800 011 3797.
Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.
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