Income related ESA and pension

There's more on the rules at DWP benefits and pension freedom .

If you take a £6,000 lump sum and monthly income payments you will be treated as having £6,000 added to your savings and the monthly pension income will count as income.

If 60 is not the normal retirement age for your defined benefit pension then it is quite likely to make you better off by waiting as long as you can until you take any of it. This is because taking a defined benefit pension earlier than its normal retirement age reduces the amount you get. Do you perhaps have any defined contribution or personal pensions? Do you maybe have credit cards or other credit available that is not particularly expensive? Depending on how much the reduction in the defined benefit pension is for taking it early it could well be cheaper to pay even mainstream credit card interest rates than taking the pension early.

If you do have personal or defined benefit pensions what you need to know about those is that whether the money taken out is treated as capital or income depends on how often it is taken. If you were to take a lump sum of £6k from such a pension, 25% tax free and 75% taxable, that would count as a lump sum and savings. If you took no regular income but instead topped up the savings with another lump sum when they dropped to perhaps £1k that might again be treated as a lump sum, not income. Be sure that you vary the levels/frequency with which you take the lump sum so that there is not a set pattern that looks like income.

If you do decide to take the defined benefit money, remember that you can pay £2880 net into a personal pension and get 25% added as basic rate tax relief to increase it to £3600. You can then take that out. Probably all tax free if you are on a low income so it's all within your personal allowance. The Virgin stakeholder pension is a good one to use for this because it has no charges for doing it. You can do this even if you have no earned income in the tax year of the contribution. It's a great way for those on low incomes to get some extra free money.