27th March 2015
Retirees who purposefully exhaust their pension pots and fall back on the state will not be given means-tested benefits, the government has confirmed.
The Department for Work and Pensions (DWP) has clarified how it would deal with those who spend their pension and then expect the state to fund their retirement, which many were concerned would add extra pressure on taxpayers.
It has now confirmed that if someone spends or gives away their pension fund, the DWP will treat them as if they still have that pension fund when calculating entitlement to means-tested benefits. Individuals will have to tell DWP and their local authority, which pays out some benefits directly, that they have accessed their pension pots.
The DWP uses pension credit – which is used to top up the incomes of the poorest pensioners – to illustrate its point.
It said in a document: ‘Once you (or your partner) reach the qualifying age for pension credit, you are expected to use your pension(s) to help support yourself. If you choose not to buy an annuity after reaching the qualifying age for pension credit, an amount of ‘notional’ income will be taken into account when your benefit is worked out.
‘’Notional’ income (in this case) is an amount equivalent to the income you would have received if you had bought an annuity. If you take an income from your pension pot, the amount which will be taken into account when assessing your benefit will be the higher of the actual income or notional income. If you take a cash lump sum, this will be taken into account as capital.’
Andrew Tully, pensions technical director at MGM Advantage, said the DWP ‘could not be any clearer in how they will treat cases where people have either deliberately or unwittingly spending their pension pots and intend to fall back on means-tested benefits’.
‘We have a duty as an industry to make it very clear what the consequences of this are,’ he said. ‘But all of the responsibility rests with the individual to tell DWP and the local authority when they take money from a pension.
‘It seems clear to me people need to pause before raiding their pensions next month, and ensure they fully understand what the potential long-term consequences of doing so are.’