Do pension lump sums (25% tax free) count as 'income' for benefits?

Some friends I'm trying to help have asked me to look something up, but I'm struggling to find a clear answer online.

They receive Housing Benefit and Council Tax benefit because of low income and low savings. They have a SIPP with some money in, but, because they have not yet reached 'qualifying pension age', these funds are ignored.
They would like to start dipping into the SIPP's, but, not by any amount which might impact their benefit entitlement.

So - It is clear to me that there is an 'Applicable Amount' of weekly income which they must not breach (in their case, it is £114.85).
Their current weekly income stands at £74.54.

As such, they could safely take £40 per week from their SIPP and have it not impact their benefits.
BUT.... If they take their 25% tax free lump sum, and it equates to £2000, would this impact their benefits?

I know the following:
- The £2000 would then become 'considered savings', and, this might impact their adjusted income, as anything over £6000 counts as £1 income for each £250 over.

They are in this situation so therefore, the £2000 lump sum would count as £8 'Tariff income from savings', meaning that in reality, they could only take £32 as a true 'weekly income'.

However (and this is my question)...
(sorry it is taking so long to get there).

Is this £2000 ALSO considered as 'income.
i.e. Would the benefits folk say:
You took £2000 out of your SIPP this year, therefore, you earned £2000, therefore you received an additional 2000/52 = £38.46 weekly income?

If so - then I suspect it is not worth them taking any 'lump sum', or, if they do, it means they could not do the £40 per week.
Its one or the other - not both.
I think I would advise them to avoid any 'lump sum' withdrawal, but just 'draw down' £40 per week and declare it.

I just wanted to run this by someone first.
Thanks.

SC
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Comments

  • Sillychuckie
    Sillychuckie Posts: 1,208
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    Thank you xylophone - that is absolutely what I was after.
    The doc states:

    Taking the whole fund (e.g. as an uncrystallised funds pension lump sum) or ad hoc withdrawals will be regarded as
    capital. This is despite the fact some or all of the amount could be taxed as income. The normal capital thresholds and
    tariff income from capital rules would apply to this sum.
    • Amounts withdrawn on a regular basis will be treated as income (n.b. it is not necessarily the amount but the frequency
    which determines this treatment)

    This is good to know, and means they do indeed have the cash lump sum option still available to them. Thank you for providing me with a link to such an informative document.

    SC
  • Icequeen99
    Icequeen99 Posts: 3,775 Forumite
    Some friends I'm trying to help have asked me to look something up, but I'm struggling to find a clear answer online.

    They receive Housing Benefit and Council Tax benefit because of low income and low savings. They have a SIPP with some money in, but, because they have not yet reached 'qualifying pension age', these funds are ignored.
    They would like to start dipping into the SIPP's, but, not by any amount which might impact their benefit entitlement.

    So - It is clear to me that there is an 'Applicable Amount' of weekly income which they must not breach (in their case, it is £114.85).
    Their current weekly income stands at £74.54.

    As such, they could safely take £40 per week from their SIPP and have it not impact their benefits.

    BUT.... If they take their 25% tax free lump sum, and it equates to £2000, would this impact their benefits?

    I know the following:
    - The £2000 would then become 'considered savings', and, this might impact their adjusted income, as anything over £6000 counts as £1 income for each £250 over.

    They are in this situation so therefore, the £2000 lump sum would count as £8 'Tariff income from savings', meaning that in reality, they could only take £32 as a true 'weekly income'.

    However (and this is my question)...
    (sorry it is taking so long to get there).

    Is this £2000 ALSO considered as 'income.
    i.e. Would the benefits folk say:
    You took £2000 out of your SIPP this year, therefore, you earned £2000, therefore you received an additional 2000/52 = £38.46 weekly income?

    If so - then I suspect it is not worth them taking any 'lump sum', or, if they do, it means they could not do the £40 per week.
    Its one or the other - not both.
    I think I would advise them to avoid any 'lump sum' withdrawal, but just 'draw down' £40 per week and declare it.

    I just wanted to run this by someone first.
    Thanks.

    SC

    I'm confused about the part in red - what makes you think that the £40 a week wouldn't affect their benefits. It would be treated as income and reduce the amount they receive.

    IQ
  • Alice_Holt
    Alice_Holt Posts: 5,902
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    Icequeen99 wrote: »
    I'm confused about the part in red - what makes you think that the £40 a week wouldn't affect their benefits. It would be treated as income and reduce the amount they receive.

    IQ

    Yes that bit confused me too.

    OP - Can you not help them get accredited advice from their local CAB / advice agency?
    Alice Holt Forest situated some 4 miles south of Farnham forms the most northerly gateway to the South Downs National Park.
  • Sillychuckie
    Sillychuckie Posts: 1,208
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    Hi IQ.
    That is not how I understand it, based on the calculation that has been explained in a letter they received.
    This is not for income support. This is only for Housing Benefit and Council Tax benefit.

    As best I can tell, the letter describes an 'applicable amount' (for a couple, in this borough). Providing their income falls below this amount, they qualify for the maximum benefit.

    The letter states:
    "As your weekly income of £74.54 is the same as or less than your applicable amount of £114.85, I can pay you your maximum council tax support of £21.86 each week".

    I am therefore concluding, that the letter would say the same, if for example their income was £114.54 per week.

    i.e.
    "As your weekly income of £114.54 per week is the same as or less than your applicable amount of £114.85, I can... etc etc".

    So it seems to me that there is indeed scope for the couple to draw a further £40 per week income without it impacting their current benefits.

    However - you may be right that there are other benefits they may receive in future (e.g. income support, JSA, ESA etc), which may be impacted. I don't know yet, as they are only in the process of applying for these now.

    SC.
  • Sillychuckie
    Sillychuckie Posts: 1,208
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    Alice_Holt wrote: »
    Yes that bit confused me too.

    OP - Can you not help them get accredited advice from their local CAB / advice agency?

    They have been there already to reach this stage of applying for things (and receiving the benefits).
    This particular query I have though is probably beyond the knowledge of the typical CAB worker (in my experience) though, and Xylophone has come up trumps with a fine answer. Thanks.
  • Icequeen99
    Icequeen99 Posts: 3,775 Forumite
    Hi IQ.
    That is not how I understand it, based on the calculation that has been explained in a letter they received.
    This is not for income support. This is only for Housing Benefit and Council Tax benefit.

    As best I can tell, the letter describes an 'applicable amount' (for a couple, in this borough). Providing their income falls below this amount, they qualify for the maximum benefit.

    The letter states:
    "As your weekly income of £74.54 is the same as or less than your applicable amount of £114.85, I can pay you your maximum council tax support of £21.86 each week".

    I am therefore concluding, that the letter would say the same, if for example their income was £114.54 per week.

    i.e.
    "As your weekly income of £114.54 per week is the same as or less than your applicable amount of £114.85, I can... etc etc".

    So it seems to me that there is indeed scope for the couple to draw a further £40 per week income without it impacting their current benefits.

    However - you may be right that there are other benefits they may receive in future (e.g. income support, JSA, ESA etc), which may be impacted. I don't know yet, as they are only in the process of applying for these now.

    SC.

    yes that makes more sense. I don't think you say what their income is for the £74 - but worth checking that it isn't impacted by this additional income.

    IQ
  • nannytone_2
    nannytone_2 Posts: 12,944
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    i dont understand why a vouple would be receiving £74 a week. there must be additional income
  • Alice_Holt
    Alice_Holt Posts: 5,902
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    nannytone wrote: »
    I dont understand why a couple would be receiving £74 a week. there must be additional income

    I think, possibly, that they have only just applied for the relevant benefits (?).
    (But I am slightly wary of a "friend" posting on behalf of others, as often the true situation is not known or is distorted).

    The OP's supposition that "they could safely take £40 per week from their SIPP and have it not impact their benefits.", only holds true if they fail to claim the relevant earnings replacement benefit (presumably JSA or ESA or UC).

    After these are in payment, and once they receive the minimum amount that the government says you need to survive - then drawing the £40 pw pension income will reduce HB, CTr, etc.

    What do you think?
    Alice Holt Forest situated some 4 miles south of Farnham forms the most northerly gateway to the South Downs National Park.
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