Britons face losing vital DWP benefits by withdrawing money from pension pots
Expert explains consequences of ‘cashing out’ pension pot
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Research from tax consultants LCP and EngageSmarter have found that a growing number of Brits aged over 55 years old are accessing their pensions through newfound ‘Pension Freedoms’. However, as outlined in their “How getting pension freedoms wrong could cost you your benefit” report, doing this could affect their ability to get other benefits from the DWP. In response to this, LCP has issued a warning to people who are accessing their pension pots too regularly ahead of the imminent cut to Universal Credit and end to furlough.
Notably, people under the state pension age are affected in two major ways when withdrawing money from their retirement funds.
Firstly, if pensioners end up with more savings, this results in a noticeable capital increase which is recognised during a DWP assessment.
Anyone with savings above £16,000 is automatically disqualified from receiving certain benefits, such as Universal Credit.
People with savings of £6,000 could face having any support from the local council with tax bills being automatically cancelled.
Furthermore, if Britons decide to use their pension to purchase a regular income via an annuity, every pound of annuity income will be deducted from their benefit income.
According to LCP’s report, 1.5million over 55s in the UK are currently receiving a form of means-tested benefit scheme, including Universal Credit and Employment Support Allowance.
Removing money from pension pots before they turn the state pension of 66 could result in pensioners seeing their benefit payments significantly reduced.
Low income Britons could see their finances severely hurt by inadvertently accessing their pension pots.
In response to these growing concerns, EngageSmarter have created a free website tool which allows savers on benefits to see how their payments are affected when accessing their pension pots.
Peter Robertson, a consultant at EngageSmarter, outlined the importance of Britons knowing how their pension pots affect their access to benefits through the DWP.
Mr Robertson said: “Our research has found that existing advice and guidance on how Defined Contribution pensions and state benefits fit together is not fit for purpose.
“There is a real risk that this leaves a gaping hole through which the most financially vulnerable may fall.
“We hope that our calculator will begin to rectify the situation, though ultimately this is a problem which the industry as whole needs to resolve in a systematic way.”
Steve Webb, a partner at LCP and co-author of the report, explained the complexities of how the UK’s benefit system interacts with pensions.
“Giving people a choice about how and when to take their pension is a good thing,” Mr Webb explained.
“But there is no doubt that people need more help and advice about how to make the choice that is right for them.
“The benefits system, particularly for those of working age, was never designed with this situation in mind.
“With millions of people starting to build up modest pension pots through automatic enrolment, this issue is only going to get bigger.
“It is unreasonable to expect individual savers to understand all of this complexity, so the industry and regulators need to work together to help people make the right choices.”
Anyone concerned about how accessing their pension pot affects their access to benefits are encouraged to use EngageSmarter’s web tool to see how their savings are affected.
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