Taking Pension Lump Sum and/or Pension Drawdown Income whilst receiving Means Tested Benefits

Shylock

A relative receives Income Related ESA.  He has a small Pension Pot from many years ago when he worked and as he's just turned 55 could now access it by taking either some Tax Free cash or Income Drawdown or a combination of both.  I presume that as long as he takes less than £6k from the Tax Free cash it won't effect his ESA.  But what about Drawdown Income?  I've tried looking for info on this but it all the info I could find relates to "Working" & "Earnings" which obviously this isn't.  Can he take a small Drawdown Income each month to supplement his ESA payments without reducing the amount of ESA he gets?

poppy12345

Any lump sum taken from the pension is classed as savings and will affect the amount of means tested benefits they are entitled to if the lump sum takes their total savings to more then £6,000.

If they take a weekly amount from the pension this will be classed as income and reduce their Income Related ESA £1 for £1. If part of their ESA is Contributions based this won't be affected providing the weekly amount is less than £85 per week. Any more than this and the CB ESA will be reduced by 50p for every £1 over £85.

What they need to find out is whether any part of their ESA is contributions based. If they're not sure then they can ring DWP to ask.

calcotti

Are they claiming anything else such as Housing Benefit too?
Taking regular income from a pension pot while on means tested benefits is a waste of pension funds, claimant is effectively simply handing the money over to the government. Only makes sense if the pension pots is big enough for the regular payments to exceed the income based benefits altogether in which case claimant might decide they could live more comfortably by taking the pension.

Alice_Holt

Shylock said:

A relative receives Income Related ESA.  He has a small Pension Pot from many years ago when he worked and as he's just turned 55 could now access it by taking either some Tax Free cash or Income Drawdown or a combination of both.  I presume that as long as he takes less than £6k from the Tax Free cash it won't effect his ESA.  But what about Drawdown Income?  I've tried looking for info on this but it all the info I could find relates to "Working" & "Earnings" which obviously this isn't.  Can he take a small Drawdown Income each month to supplement his ESA payments without reducing the amount of ESA he gets?

       Doesn't seem a good idea to me.  As income based ESA it will reduce £ for £ by the pension drawdown income. He will be no better off. 

   Pension Wise may be able to give general info on the wisdom (or otherwise) of taking a pension pot early.
    https://www.pensionwise.gov.uk/en

Shylock

Thanks for the feedback.  So, as I understand it, he could take a Lump Sum of less than £6k (he has no other savings) and gradually spend it over a couple of years, then repeat until he's used his Tax Free Pension Commencement Lump Sum without it effecting his Benefits?  But if he takes regular drawdown income it will effect his Benefits "pound for pound"?

Alice_Holt

Shylock said:

 So, as I understand it, he could take a Lump Sum of less than £6k (he has no other savings) and gradually spend it over a couple of years, then repeat until he's used his Tax Free Pension Commencement Lump Sum without it effecting his Benefits?  

      Yes, unless a DWP decision maker deems that taking regular TFLS's over a number of years constitutes taking income.  He should be aware of that risk.  It's unlikely that a forumite would be able to accurately assess that risk, it would be a decision of DWP DM.  Note that such a decision is carries appeal rights.

NedS

Alice_Holt said:

Shylock said:

 So, as I understand it, he could take a Lump Sum of less than £6k (he has no other savings) and gradually spend it over a couple of years, then repeat until he's used his Tax Free Pension Commencement Lump Sum without it effecting his Benefits?  

      Yes, unless a DWP decision maker deems that taking regular TFLS's over a number of years constitutes taking income.  He should be aware of that risk.  It's unlikely that a forumite would be able to accurately assess that risk, it would be a decision of DWP DM.  Note that such a decision is carries appeal rights.

Yes, the key here is regularity. A decision maker would also likely consider if it were one pension that the claimant were dipping into on a regular basis deliberately keeping withdraws around £6k, or if each payment constitutes taking a separate pension pot in full. The former looks like an attempt to withdraw money from a pension with the intent to still claim means tested benefits, whilst the latter does not.

A more natural thing for someone to do would be to withdraw an UFPLS of £16,666 each year as this maximises their tax free allowance, with 25% being tax free and the remainder making up their £12,500 tax free allowance. However, this would put them over the £16k capital limit to claim means tested benefits, so regularly withdrawing smaller sums makes it pretty obvious what you are doing.