You may remember from the press coverage at the time that the pensions minister, Steve Webb, suggested that a new pensioner might spend their capital on a Lamborghini rather than a long term income. The Department of Work and Pensions (DWP) have made it clear that the normal means-tested benefit rules will apply to pension credit as well as the other common benefits. (https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/417473/pension-flexibilities-dwp-benefits.pdf)
In practice, any claim for a means tested benefit, like pension credit, will be subject to the rules around “deliberate deprivation”. To put this concept into a nutshell, if you reduce your personal income or capital to qualify for benefits, then the assessing officer may decide to ignore the purchase of an asset or gift of capital and ascribe a notional value of income you are “deemed” to receive. If your new adjusted income or capital is higher than the thresholds, then you will get no benefit!
The practical upshot is both complex and unpleasant as there is no certainty. Local decisions will vary and what is likely to be acceptable in one area may be rejected in another. There is an appeals process, but it is legalistic, slow and focused on the law, rather than the likely practical outcome, so avoiding the necessity for an appeal would be wise.
There is a formal rule book, the Decision Maker’s Guides, (see https://www.gov.uk/government/publications/decision-makers-guide-vols-4-5-6-and-7-jobseekers-allowance-and-income-support-staff-guide for examples), but no one would describe these as recreational reading!
The volume that relates only to capital is no easier a read, (see https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/410842/dmgch29.pdf, Chapter 29, Capital), so it is very difficult to give any definitive rules around this issue, but past decisions suggest that some things are more likely to be acceptable than others.
Imagine the situation where you are 58, have a pension pot of £18,000, credit card debts of £5,000 and live in rented accommodation. You will have no entitlement to state pension for some years and your credit card debts are starting to grow, as the interest charges are rising.
Cashing in your pension is easily done under the small pot rule and will give you roughly £4,500 as tax free cash, and £10,800 after tax on the remainder, assuming you were earning enough to use up your personal tax allowance and not enough to pay higher rate tax. So, after cashing in your pension, you have capital of £15,300. Prudently, you pay off your credit card debts, leaving yourself with capital of £10,800. Under the rules for Job Seekers Allowance and Housing Benefit, this amount of capital will reduce your benefit by a notional income amount, so reducing your capital to less than £6,000 starts to look attractive.
If the benefit decision maker believes that you have deliberately reduced your capital to qualify or increase your benefit, then they can prevent or restrict any benefit paid. Some expenditure is considered to be acceptable, but it would be wise to keep receipts or even ask the DWP in advance of any expenditure, to prevent your actions from haunting you later.
For financial advisers, this presents yet another potential nightmare; although you can take you pension out as cash, this does not mean you should! If you have enough income in retirement not to need access to benefits, then this is will be an irrelevance, but for those who might run out of money in later years, it is a serious danger.
The Personal Finance Society, (PFS), has gone into print saying that advisers should not facilitate transactions where the formal advice given has been not to do something. Where the adviser believes cashing the pension pot is not ideal, the client needs to be referred back to the provider. This DWP attitude to pension release is another bear trap for the unwary!
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The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.