Contribution based ESA and pension tax free lump sum

ASB1960

I receive a PHI payment from my employer and remain employed. This is from a policy held by my employer which I did not contribute to. It is subject to tax and ni.

I also receive contribution based ESA. I am in the support group (4 years now). The PHI,  because I am still employed, is disregarded. This is also subject to tax (via my completion of a tax return).

In 3 years or so my mortgage is due to be paid off (it is an offset). I will have a shortfall, probably 50k area.

The only way for me to deal with this is from my pension funds. (Currently they will not extend the term. I have redrawn some capital to renovate which makes me fail the affordability criteria).

If I take a regular income from my pension then anything in excess of 85/week reduces my contributory ESA (it would eradicate it when approx 15k. Is taken).

The situation is unclear to me with lump sums.

I can take a certain amount of tax free cash. Can anybody point me to how this is treated (whether it does or doesn't affect contribution based ESA).

I could also take a taxable lump sum. Again how is this treated (I imagine as income).

A further complication is the impact on tax relief going forwards. Contribution of approx 8k pa are still being made to my pension. Would the reduced MPAA of 4,000 apply if taxable funds have been withdrawn - it appears they would).

Dazed_and_C0nfused

MPAA applies if you flexibly access £0.01 or more taxable income from a DC pension.

So buying an annuity, although not currently in vogue, will not trigger the MPAA.

calcotti

ASB1960 said: I can take a certain amount of tax free cash. Can anybody point me to how this is treated (whether it does or doesn't affect contribution based ESA).

I could also take a taxable lump sum. Again how is this treated (I imagine as income).

‘Ad hoc’ lump sums (whether taxable or tax free) are an increase in capital and have no impact on contribution based ESA. If you took several lump sums such that they might be considered regular then DWP might seek to treat them as income - which would have the consequences you mention in your post.

ASB1960

calcotti said:

Lump sums (whether taxable or tax free) are an increase in capital and have no impact on contribution based ESA.

I had read that. Is there anywhere in the regulations you can point me to ?

It does seem a bit illogical. If I have an annuity that is counted as income. If I take a regular drawdown payment it is treated as income.

But if I take an ad-hoc lump sum it is counted as capital. There must surely be some point at which they consider it as income. (eg take 10k one year, then 12k, then 8k looks very much like income. Take 20k and pay down a debt much less so).

Though I do need to try and avoid taking any taxable since that will cost me a good chunk of tax on the contributions due to MPAA triggered.

calcotti

The point at which ad hoc withdrawals become ‘regular’ and therefore fall to be treated as income is a grey area. In my opinion (and it is only my opinion) what the money is used for ought to be relevant. If you take several lump sums, stick them in the bank and then use them to help pay your household bills that is clearly being used to supplement income whereas taking a lump sum and paying off debt is not.

I can't find the relevant paragraph of guidance at the moment. Will post it later if Ido.

Alice_Holt

ASB1960 said:

calcotti said:

Lump sums (whether taxable or tax free) are an increase in capital and have no impact on contribution based ESA.

 There must surely be some point at which they consider it as income. (eg take 10k one year, then 12k, then 8k looks very much like income. Take 20k and pay down a debt much less so).

Though I do need to try and avoid taking any taxable since that will cost me a good chunk of tax on the contributions due to MPAA triggered.

Contribution of approx 8k pa are still being made to my pension.

         It will very much depend on the judgement / interpretation taken by the DWP decision maker. 

        Why not direct some of the £8k  currently contributing into your pension to reducing the mortgage? 
        If you are accessing a lump sum from your pension in only 3 years time, you are a looking at a very short time period for those particular S & S contributions.   Depending, of course, on where markets go, you may have a better   chance of settling the reduced mortgage out of a tax-free lump sum.
  That would also enable you to rebuild the pension after settling the mortgage.   

calcotti

Guidance:
See https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/932377/dmgch51.pdf
paragraph 51002, 51542 to 51545.

ASB1960

I cannot redirect the pension contributions. They are employer contributions.

I estimate the active DC scheme, if there is a 4.5 overall return, will yield around 37k tax free cash (the main fund is in pre drawdown. I took its then 50k odd tax free to reduce the mortgage 4 years ago when I got sick).

However I also have a S226 policy. This has a high GAR and this increases.

I could take the annuity now with an escalator of 5% (which would yield a little more than the 85/week claw back threshold). This would enable me to reduce the shortfall significantly.

Alternatively I could take the tax free cash from here to pretty much eliminate the shortfall.

This avoids the MPAA issue but exposes me to ESA claw back. I had intended to take the pension at 67.

I guess the adverse consequences of this are better than having to take any taxable sum. I need to do a load more calculations.

My preferred method is still to remortgage. I will see if I can find a more amenable lender, though I am not hugely optimistic since I am also named on the mortgage on my partner's house and my income has substantially reduced since then.