One off small lump sum drawdown from Private Pension affect on Universal Credit

BusyDoinNothing

Hi, and firstly apologies for asking a question which has been discussed before. I have read some answers but am still not confident of a definitive answer.
I currently receive both Universal Credit including limited capacity for work due to long term physical illness and mental health issues. I also receive PIP.
I have a so far untouched private pension pot of £350k and have recently turned 55.
I may have to drawdown £5000 as a one-off from my pension but am confused and worried about four things.

• Will I pay tax on this one time drawdown ?

• Will Universal Credit treat this drawdown as unearned income and reduce my UC in the short term ?

• Will Universal Credit treat the remaining sum in my private pension as available income and stop my entitlement permanently ?

• If I contact Universal Credit directly to ask these questions would they then treat my entire pension pot as an available income even if I don’t touch any of it ?

If anyone can give me clear answers to each question I would be very grateful.

Marcon

BusyDoinNothing said:

Hi, and firstly apologies for asking a question which has been discussed before. I have read some answers but am still not confident of a definitive answer.
I currently receive both Universal Credit including limited capacity for work due to long term physical illness and mental health issues. I also receive PIP.
I have a so far untouched private pension pot of £350k and have recently turned 55.
I may have to drawdown £5000 as a one-off from my pension but am confused and worried about four things.

• Will I pay tax on this one time drawdown ?

• Will Universal Credit treat this drawdown as unearned income and reduce my UC in the short term ?

• Will Universal Credit treat the remaining sum in my private pension as available income and stop my entitlement permanently ?

• If I contact Universal Credit directly to ask these questions would they then treat my entire pension pot as an available income even if I don’t touch any of it ?

If anyone can give me clear answers to each question I would be very grateful.

You can take up to 25% of your pot as tax free cash, so if you specify to your pension provider that you want to take £5,000 from the tax free portion, you won't pay tax on it.

I don't have enough knowledge of benefits to answer definitively on UC, so will leave that to someone who can be sure they know the right answer.

BusyDoinNothing

Thank you Marcon. Appreciate the reply.

Not sure the message about Googling my questions is a generic message. I have Googled, ChatGP’d and DeepSeek’d my questions and have found quite opposing answers hence my confusion and concern.

tacpot12

I can confirm that if you contacted UC directly to ask these questions, then once they know you have a personal pension, they would not treat any of your pension pot as available income. Only when you reach your State Pension age would they expect that you draw on a private pension. (You can look up the rules on Notional Income for more information on this). 

I would suggest that contacting the DWP might not result in a useful answer, because the adviser may just say that it would be down to a decision maker to decide whether the lump sump was unearned income or not. The answer is that the lump sum should not be treated as income. Unless you receive further lump sums from the pension, it should be clear to the decision-maker that this is not income, but is a capital payment. I would love to be able to give you a reference that you could look at to check this, but my sources are all discussions on benefit forums, and there are no links to any references to confirm the opinion of the people in the discussion. However, I believe that there is sufficient weight of opinion for you to be confident that a one-off payment (especially if the pension provider provides paperwork confirming that the money is a Pension Commencement Lump Sump) will be regarded as a capital payment and not income. 

So then there is a question as to whether the payment takes you over the £6000 level of cash you have on deposit. It sounds like you are taking the money under some form of duress. If it is money needed to pay a (legally enforcible) debt, then even if the money takes you over the £6000 threshold, providing you pay the debt within the assessment period that the cash arrives in, the DWP will not assess you as having more than £6000 of capital and will not consider that you have deliberately deprived yourself of the cash if you have paid a (legal) debt or used it for any reasonable purpose, such as replacing the boiler and hot water cylinder in your home.

If you do need the money to pay a debt, given the amount, I would recommend talking to a debt charity (e.g. StepChange.org) for advice. 

Ultimately, you won't pay any tax, but depending on how you withdraw the money, you might pay some tax and then have it refunded.  

Your options to take the money are:

• crystalise £20,000 of your fund and take £5,000 tax-free as a Pension Commencement Lump Sum (PCLS). Because this is tax free you will pay no tax.
• ask for a Uncrystallised Funds Pension Lump Sum (UFPLS) payment of £5000. This is a taxable lump sum. As you have no income other than UC, which isn't taxed, your personal allowance for income tax will result in any tax you pay being refunded, but this will take time to receive the refund.

When you are ready to start taking a regular income from your pension, you might want to take advice about both of these options.

BusyDoinNothing

Thank you tacpot12, that’s really useful and reassuring. The details on the options around crystallising the drawdown is something I had never heard of so will definitely check with my pension provider. Very grateful for your response.

BettieBooBop

Hi All, I'm in a similar situation and will receive an investment payout though considerably less than OP, from money I chose to invest over 30 years ago. 
Would home improvements (decorating rooms that haven't been decorated for 20+ years), upgrading a PC/laptop so they're fit for running Windows 11 be considered as trying to spend the money to avoid losing any UC? I will also be paying off my partners credit card debt.
My last lump sum bought a 14 year old second hand car, a year's insurance and kept me afloat while my partner couldn't work as he went through two major operations to remove cancer.