Income gone, which of these options is best

Shirleyshr55

I'm self employed and my business looking after dogs has lost all clients until people can go abroad or holiday here again. I'm 55 and have my pension fund in a flexible access drawdown. I know something might yet come to help but at the moment I have this choice. Take some money from the pension to live on or borrow. I'm debt free apart from the mortgage for the first time in my adult life so an not keen to borrow. I've had the 25% tax free.

calcotti

Look at Universal Credit. https://www.citizensadvice.org.uk/benefits/universal-credit/   There are online calculators to help you assess entitlement  https://www.gov.uk/benefits-calculators
You will be excluded from UC if you have savings over £16,000 but pension funds are ignored.

Jeremy535897

You are asking for advice that is regulated. Try https://www.pensionsadvisoryservice.org.uk/
From a tax point of view (unregulated advice) a year with no other income is a good year to pick for taking income out of a pension fund, and as you are already in flexible access drawdown it won't change what you are allowed to put back in if you earn money in future. If you could claim universal credit taking cash from your pension will directly affect your entitlement. See  https://thepeoplespension.co.uk/help/knowledgebase/how-will-accessing-my-pension-pot-affect-my-means-tested-benefits/

calcotti

Jeremy535897 said:

If you could claim universal credit taking cash from your pension will directly affect your entitlement. See  https://thepeoplespension.co.uk/help/knowledgebase/how-will-accessing-my-pension-pot-affect-my-means-tested-benefits/

Good point. Any pension income will be deducted in full from any UC entitlement. I would definitely check out UC entitlement with a calculator. If UC will give yo enough to live on it doesn't make sense, in my opinion, to diminish your pension funds. If you need more income than the benefit system will provide then pension drawdown may be your preferred option - but obviously has an impact on your future. Drawing out money when there has already been a capital loss is the worst time to do it because it reduces the ability of your fund to recover if times improve.

Note that if you take a lump sum from your pension and use this to pay down your mortgage it will not affect UC entitlement.

Although you have already taken our tax free lump sum if you do decide to draw an income from your pension you do of course have a £12,500 tax free allowance from 6th April.

Jeremy535897

Calcotti, once you're in flexible drawdown and have already taken the tax free lump sum, you can draw anything you like whenever you like, if the cash is there, but it is all 100% income for tax purposes, deducted at source. Is UC more generous in saying some of it is capital?

calcotti

Jeremy535897 said:

Calcotti, once you're in flexible drawdown and have already taken the tax free lump sum, you can draw anything you like whenever you like, if the cash is there, but it is all 100% income for tax purposes, deducted at source. Is UC more generous in saying some of it is capital?

Benefit rules on this are complicated and come down to a Decision Maker to decisde so there are no guarantees. The general rule is that regular withdrawals are treated as income but ad hoc withdrawals are treated as capital. The grey area is if someone takes a large sum  and lives off it for say 6 months and then takes another - at what point does that become a regular withdrawal which falls to be treated as income. I think it is clear that if you take a large sum and use it to pay down a mortgage then for benefits purposes that is capital. Under UC paying off debt is never treated as deprivation of capital (whereas this was not the case on legacy benefits).

NOTE: These rules apply to claimants below pension age. Once they reach pension age the treatment of pension funds is different.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/831930/admh5.pdf

Personal pensions

H5019 Income from personal pension schemes should be taken fully into account1. Personal pension schemes provide pensions on retirement for

1. S/E people or

2. employees who are not members of occupational pension schemes.

Income and capital drawdown 

H5174 Whilst a claimant’s pension pot is held by the pension provider then the value of the right to that sum falls to be disregarded as capital for the purposes of UC1. Pension flexibilities allow people to withdraw money from their pension pot. This is known as a drawdown. If the claimant has withdrawn money from their pension pot then a determination has to be made as to how this is to be treated for the purposes of UC.

H5175 Where a claimant chooses to

1. take ad-hoc withdrawals or

2. take the whole sum

then the amount withdrawn falls to be treated as capital. (see ADM Chapter H1).

H5176 Where a claimant chooses to withdraw amounts on a regular basis then those amounts fall to be treated as income and taken into account as such.

Jeremy535897

Thanks very much Calcotti.