Universal Credit and Pension Draw Down

RobinHill

Just in case this is of use to anyone. Though the topic bridges both benefits and retirement planning.
I am in receipt of Universal Credit LWCRA + DLA. I am able to access my DC pension under ill-health rules.
It transpires that lump sums can be drawn down from the pension fund, and are viewed as capital not income, and as such are disregarded so much as the relevant savings thresholds are not breached.
See "capital_disregards_v11.0.pdf" ... "any lump sum draw-downs from a pension fund will be taken into account as capital in the UC assessment"

So whilst on UC lump sum draw downs from a pension fund are permitted and disregarded as long as the amount is under the required level.
This has been confirmed by the DWP.

Dazed_and_C0nfused

How do DWP distinguish between a taxable "lump sum" and taxable non lump sum payment when it comes to the Real Time Information details the pension company have to report for UC purposes each month?

RobinHill

I don't know the answer to that D&C other than as I understand the topic taxation is a different matter. In my instance I would be drawing down from the 25% tax free element.
I am not too knowledgeable about the subject, just that DWP / UC confirmed that I can draw down from my pension fund and this would be considered capital and not income, and if my total savings are for example under £6k then they are disregarded.

Dazed_and_C0nfused

Are you only referring to the TFLS lump then?

RobinHill

Yes in my case. However I understand it doesn't have to be as tax wouldn't be an issue if under the personal allowance ... just the UC rules are relevant here.

Dazed_and_C0nfused

So you mean you can take taxable income from the pension and if you can persuade DWP that it is a "lump sum" then it is ignored for UC purposes.  Interesting.

RobinHill

No, if "income" is taken then it will follow the income rules. However if you are drawing down a lump sum then this is not income and it follows the rules regarding capital. As I mentioned it seems too good to be true to me, however DWP confirmed this, and I also checked with my pension company that I could generate capital lump sums and not income. However this only regarded taking chunks of the 25% tax free element. See DWP document extract below. However, yes it does seem an interesting avenue.

"Important Note – the disregard only applies to the value of pension fund that the claimant and/or his employer has paid into, this protects investments for retirement. It does not apply to money drawn out of the pension fund. Any income payments from a pension fund or annuity payments will be taken into account as unearned income and any lump sum draw-downs from a pension fund will be taken into account as capital in the UC assessment "

NedS

This is correct. A TFLS is treated as capital and is subject to the normal capital rules, so as long as it doesn't take your total capital over £6000 will have no effect on your UC. However, note that regular lump sum withdraws can be treated as income so you will not be able to take lump sums on a regular basis and have them disregarded. The definition of regular will be down to a decision maker (DM), but if your intention is clearly to keep taking small lump sums (less than £6000) from a pension to supplement your income whilst continuing to claim UC (for example, £5000 every 6 months) then a DM will likely treat these as regular income rather than capital (IOW you will likely get away with this once). Any taxable income (i.e, not a TFLS) taken from a pension will be treated as pension income by UC and deducted pound for pound.

RobinHill

Hi NedS, 

Yes, not sure what the UC definition of regular would be. In my case any such draw down would from the TFLS element, and I understand would be irregular as essentially random, for eg. holiday, house works, repairs, sofa etc. Basically anything that I may require but perhaps not able to afford through regular income. Much to my surprise the DWP confirmed that this is allowed.

I think that I understand the mechanics of the crystallisation process ... eg. if I wished to draw down £4k then £16k would be crystalised, with the 25% TFLS being taken as capital. This process would be repeated as required, remaining TFLS amount permitting. However what I don't really understand is what is the status of the remaining £12k crystalised. I believe that as you are not expected to generate an income via draw down until SPA this is ring fenced as far as UC are concerned, but it is this bit that I not totally sure about.

Albermarle

The £12K stays invested in your pension until you withdraw it as taxable income ( even if you do not actually pay any tax due to having a low income ) . You can do this at any time of your choosing , or just leave it where it is . There is no connection with the SPA .

RobinHill

So even though crystallised the £12k is still in a pension fund and will be disregarded for UC purposes.
The reference to SPA was with regards to UC ... even though you could generate an income from it, you are not expected to do so until SPA.