Small Pot Lump Sum - Impact on Pension Credit and Housing Benefit (Income / Capital)

iecuk

Afternoon, 

I am trying to help my mother in law with a decision on whether to accept a on-off lump sum (small pot) from a pension that was transferred to her after my father in law died. She has explained her worries to me and I have read up as best I can, but just hoping for some feedback from others on whether I am understanding things correctly please.  

At the moment, she is already in receipt of means tested benefits including Housing Benefit and Pension Credit and does not have savings exceeding £10,000 (or anything else to be considered as capital). My mother-in-law would like to take the lump sum (instead of the existing small weekly pension payment) to know she has some savings to fall back on if required. In doing so, we will obviously have to advise Pension Credit and Housing Benefit of the change (reduced weekly income as as result of the lump-sum payment), and my mother-in-law is worried about the overall impact. We also understand that there will likely be tax deducted from the lump-sum (first 25% tax free?) that we may be able to partially reclaim at the end of the financial year. 

The first concern she has is whether it would impact on the benefits that she relies upon. My understanding is that the lump sum would be treated as capital and would only have an impact on her means tested benefits if it took her savings (the only capital she has) over £10,000 - which it won't. Assuming this is correct, the only point I don't completely understand is whether the income she has been receiving from the pension (roughly £7 per week) will still be considered as "notional income" because she has in effect reduced her weekly income by choice (through taking the lump-sum), or whether it will be removed from the Pension Credit and Housing Benefit calculations all together? 

The second concern is that my mother in law has been wanting to take out a prepaid funeral plan and is due to finalise the details and pay for this (one-off payment from savings) in the next week. From what I understand, the value of funeral plans is not considered as capital, so will not come into the calculations. Again, assuming this is correct, my stumbling point here is whether her purchasing this funeral plan could instead be considered "notional capital" due to the sizeable cost of several thousand pounds ahead of her then reporting changes a month later? 

My mother-in-law is concerned that she will be scrutinised and have her benefit support reduced for making a large purchase from savings and then replacing some of the that a month later with the lump-sum. As a result, she is considering not taking the lump sum, despite that being her preference (to have some savings in hand) rather than continuing with the small weekly payment.  

If I understand it correctly, my mother-in-law should be able to purchase her funeral plan and take the lump sum with nothing to worry about. Her capital (bank balance) will remain under £10,000, so at worst her benefits will either:

1. remain the same if they choose to consider her previous pension income as "notional", or
2. increase by a couple of pounds if the previous pension income is removed from the calculation altogether

Am I right in the above or have I misunderstood something here?

Thanks in advance for any advice.  

HillStreetBlues

My view is the same as yours. A prepaid funeral plan is fine and totally allowed whenever it's taken out,
There is nothing wrong with taking the lump sum and that it fine it's can't be classed as notional income as she still has the money in capital form.
 

kaMelo

Ignore me, I missed the part that she is already being assessed as receiving notional income from the pension.

Otherwise I agree, everything should be okay.

iecuk

Thank you to you both for the feedback; I am sat with my mother in law now and she is reassured by your comments in response to the conclusions I drew from my own research. 

Thank you again.