Pension freedoms and benefits

SallyG

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/417473/pension-flexibilities-dwp-benefits.pdf

"If you do not take your pension, it will not be taken into account when your entitlement to contributory benefits is worked out. Any cash lump sum you take that is deemed to be capital will not affect entitlement to a contributory benefit."

"If you take an income from your pension pot, the amount which will be taken into account when assessing your benefit will be the higher of the actual income or notional income. If you take a cash lump sum, this will be taken into account as capital."
So for people in drawdown after April DWP will assume 150% GAD as notional income?

SnowMan

SallyG wrote: »

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/417473/pension-flexibilities-dwp-benefits.pdf

"If you do not take your pension, it will not be taken into account when your entitlement to contributory benefits is worked out. Any cash lump sum you take that is deemed to be capital will not affect entitlement to a contributory benefit."

"If you take an income from your pension pot, the amount which will be taken into account when assessing your benefit will be the higher of the actual income or notional income. If you take a cash lump sum, this will be taken into account as capital."
So for people in drawdown after April DWP will assume 150% GAD as notional income?

No it will be 100% GAD as per the Autumn statement

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/382327/44695_Accessible.pdf

2.66
Pensions: changes to notional income rule - To assess means-tested benefits for those over the pension credit qualifying age, the government will change the notional income rules applied to pension pots which have not been accessed, or have been accessed flexibly, from 150% to 100% of the income an equivalent annuity would offer, or the actual incometaken if higher.

The interesting thing in the statement in post 1 is the line

If you take an income from your pension pot, the amount which will be taken into account when assessing your benefit will be the higher of the actual income or notional income. If you take a cash lump sum, this will be taken into account as capital.

This COULD mean that if someone is entitled to means tested benefits after state pension credit age and has no savings but a relatively small defined contribution pot, let's say £10,000 then they may well be best off taking the £10,000 out of the pot say as UFPLS. As capital will then be £10,000 and so ignored for means tested benefits, the person gets good value from their pension pot. The question is does the statement above mean that the £10,000 taken out is not treated as income, (noting it says cash and not tax free cash, and it does not make clear whether it is treated as capital or as both income and capital).

If they take an annuity or leave the fund uncrystallised then the annuity or notional annuity treatment if they are just above the pension credit threshold could mean they lose 85p in the £1 of that annuity if they rent (because of the 65% taper for housing benefit and usually 20% taper for council tax support). Or for those below the pension credit threshold they could lose most of the value of the annuity because the annuity simply reduces the amount of guaranteed pension credit £ for £ (which will only be partly offset by savings credit, which itself will be abolished shortly for those coming under single tier).

Note each case will be slightly different and requires individual consideration, and this all hangs on the interpretation of taking a cash lump sum being treated as capital, meaning 'taking a cash lump (75% taxed or 25% tax free) is treated as capital and not income'. This is as unclear as an unclear thing.

SallyG

Shouldn't this "notional income" now be based on actuarially calculated drawdown rate?

Or maybe that's what GAD is ........?

SnowMan

SallyG wrote: »

Shouldn't this "notional income" now be based on actuarially calculated drawdown rate?

Or maybe that's what GAD is ........?

Yes. GAD stands for Government Actuary's Department, and the (100%) GAD rate is equivalent to a single life, non-increasing annuity rate calculated based on relevant gilt yields.

Seems a fair way to treat it.