18th May 2016 at 12:40pm
Many people want to know if taking their pension savings can affect their State benefits.
The pension freedoms which arrived in 2015 have brought more choice and flexibility when it comes to pension savings, from the age of 55. You can take your money when you want, either as lump sums or on a regular basis, with 25 percent tax free.
But those freedoms have also made things a bit more complicated as people try to get to grips with what the changes mean.
So, back to the question: Can the money you take out of your pension savings affect your eligibility for some benefits? In short, the answer is yes, they can. But it’s important to remember that each benefit has its own rules as to how much income or savings you may have before benefits begin to be withdrawn.
Why your income matters when it comes to benefits
Some benefits are not means tested against income. Free TV licenses for those aged 75 and winter fuel payments are well-known examples. It’s all down to your age.
Does your pension count as income?
Yes it does. Your income includes any money you take from your pension as well as earnings you get from any employment, savings, National Savings Bonds and certificates, investments and any property you own other than your main home.
If you are in receipt of the State Pension, it counts too, but it’s worth highlighting that Disability Living Allowance and Attendance Allowance aren’t treated as part of your income.
How can this affect you?
If you, or someone you know, depend on certain means-tested benefits, it makes sense to carefully plan what you take out of your pension savings in each tax year, which runs from 6 April to 5 April.
If you were to take out some or all of your money and nudge your income over the threshold, you could lose out. By taking a little less, you might keep your benefits. Your savings will last you longer too.
Many people rely on housing benefit or council tax support and need to be aware of this.
What if you take pension savings and spend them?
With pension freedoms still relatively new, some people want to know if taking your pension savings – perhaps even cashing your entire pension in – and then spending it to reduce your income would mean they would continue to receive benefits.
Applications for means-tested benefits typically cover not just what assets and income you have, but also what you could have had. If you have deliberately spent or given away your savings so that you could claim additional benefits, you could be assessed as if you still had them.
Equally, if you have a pension but have chosen not to take an income from it, that too can be included.
And from a practical point of view, spending all your savings at once could mean you end up paying too much tax – only the first 25 percent is tax free, with the rest taxed as income.
Importantly, you could run out of money and leave yourself too little to live on when you need it most.
If you need more help
If you’re unsure and looking for some more information, Citizen’s Advice can help you understand your particular circumstances.
The information in this blog or any response to comments should not be regarded as financial advice and is based on our understanding in May 2016.