Pension lump sum and benefits

Altior

Does anyone have a good source of information in regard to accessing DC pension pots when on state benefits, before state pension age.

Specifically I am endeavouring to identify, under current legislation, the impact on NS ESA and UC if, for example, a £20K lump sum is withdrawn from a DC pot, and the whole net amount received is paid over to reduce debt (ie mortgage) on the same day.

What I have found is a bit woolly to be honest, but seemingly a lump sum is treated as capital and not income. But in my example, the capital wouldn't be included in the AP closing capital balance, and it's not DoC to pay outstanding debt down either.

So is that allowable, and would it impact any existing benefit claims?

NedS

NS ESA is not means-tested so the amount of capital you hold is not relevant.

UC is means-tested. The definitive sources are the UC Regulations 2013 and DWP's on Advice for Decision Makers (ADM) guidance.

As you state, any lump sums withdrawn from a pension are treated as capital, not income. This is defined in UC Reg 46(3) in the Capital section of the UC Regulations:

https://www.legislation.gov.uk/uksi/2013/376/regulation/46

46(3) any sums that are paid regularly and by reference to a period,
for example payments under an annuity, are to be treated as income even if they would,
apart from this provision, be regarded as capital or as having a capital element.

and is also covered in the ADM, H5175 and H5176:

H5175 Where a claimant chooses to
1. take ad-hoc withdraws, or
2. take the whole sum

then the amount withdrawn falls to be treated as capital

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(UC Regs, reg 46(3))

So to be treated as income they would have to be regular payments with reference to a period - for example £1,000 every month, otherwise they are treated as capital.

As you correctly state, paying of legitimate debt is not classed as deprivation of capital (DoC) under UC, so as long as you use the capital to pay off legitimate debt before the end of the AP there is nothing to declare and this will not affect your UC claim.

Keep all documentation as receipt of the large pension payment may well flag up of data sharing between HMRC and UC, so you may get questioned on it.

Altior

https://forums.moneysavingexpert.com/discussion/comment/81913846#Comment_81913846

Nice one, that's brilliant info, thanks NedS!

Before I got ill, I was planning to clear my mortgage using TFLS, before state pension. I also have a very modest DB, that would start paying at 65 unless I defer. It's £200 pcm in today's money, so very modest. But better than not having it.

I got pretty unlucky with the legislation shifting and pension access in normal circumstances will be age 57 now instead of 55. If it was 55 I could probably have been able to get through it all without UC. Unfortunately I failed to secure protected rights even though I was aware of it, doh.

Basically my new scenario means I will likely be taking up the SMI loan. But I want to be able to clear the loan without it getting out of hand, if I can do that with lump sum DC extraction when that becomes available to me, that will be ideal. On my forecasts I may be able to overpay the capital balance on my mortgage as well, that will also help keep the SMI exposure in check. Taking an uncapped loan with an unknown daily interest rate is so against my DNA, but I need to face up to my new reality.

NedS

Any assets held within a pension are disregarded until you reach State Pension Age (SPA), so I'm assuming 67 for you?

That means you can defer the DB pension that would normally go into payment at 65 until you reach SPA should you so wish and it would not be regarded as deprivation of income for the purposes of means-tested benefits. If you put a DB pension into payment it will be deducted gross from any means tested benefits that may be in payment (UC). Same with any regular income (drawdown or annuity payments) taken from a DC pension pot. Irregular lump sums are always treated as capital.

The only grey area is if you were to regularly take ad-hoc lump sums from a DC pension pot to top up your capital or pay off debt. DWP may want to class this as income due to the regularity (note DWP chooses to ignore the "by reference to a period" part in H5176), but without reference to a period they should still be classed as capital under UC Reg 46(3).

Yamor

See also this recent case law:

https://assets.publishing.service.gov.uk/media/68baece8cc8356c3c882ab64/UA-2024-000855-USTA_UA-2024-000856-USTA_UA-2024-000853-ULCW.pdf

Altior

Many thanks both, this is fantastic info.

Yes my formal state retirement age is 67, if they don't change it on me again!

Of course legislation can change, however I'm now satisfied that I can follow through on the SMI under current law, with a view to reducing the liability with ad hoc lump sum withdrawals. It's highly unlikely I will be in a position to re-mortgage, my current lender allows overpayments of 10% per calendar year, so potentially I can achieve both overpaying and reducing SMI liability. I should be able to do at least some of it using a marginal 0% tax rate. Though this is several years into the future still, it helps with decision making now.

I feel like the inverse is therefore also true, that lump sum contributions are capital (or it follows it's possible DoC), whereas regular contributions are not. Anyone on no earned income is permitted to contribute £3600 gross (£2880 net) per tax year. For several months already I have been putting £55 per week into a SIPP. 355*52 being £2860. My plan was to contribute that amount every week until I am 75 if I'm still around, so I can't really be accused of DoC! I did also put in an amount equivalent to my support group backpay as I identified that it is disregarded for 12 months (and I'm not even applying for UC for at least another 5 months, possibly January when I can first overpay another 10% in 2027, ERC free). It's falling into place for me now finance wise, and I am in the process of purging savings accounts and from next month I will only be contributing into a couple of regular savers. They'll all be gone by August apart from the one that doesn't allow closure until maturity (only £270 in it).

NedS

Regarding pension contributions:

As you state, if there are not relevant earned income, under HMRC tax relief rules, anyone can contribute a maximum of £3600 gross (£2880 net) into a private pension and receive tax relief.

UC has no limits on the amount one can contribute into a pension from earnings. UC Reg 55(5)(a) allows for:

any relievable pension contributions made by the person in that period;

to be deducted from a persons earned income when calculating their entitlement to UC, so as long as the contributions are relievable under HMRC rules, they are allowed. The cannot be deprivation of income because the income has been received and subsequently contributed into a pension scheme. To have deprived yourself of said income, by definition you cannot have received it (see ADM H3205)

If there are no relevant earnings (from employment), then arguments are less clear cut. One could argue that small regular pension contributions up to the £2880 net limit are made from unearned income (benefits) rather than capital, especially if one can also demonstrate that capital levels have remained unchanged. A larger single £2880 annual contribution would appear to have come from capital and as such could be argued to be deprivation of capital (I do not personally believe it is) and I believe there may be existing case law around this. Perhaps @Yamor can point us to relevant case law?

The reason I do not personally believe moving capital into a pension should be classed as deprivation of capital is that under the common meaning of deprive/deprivation should mean to no longer have something, and clearly if you move the money from a bank account to a SIPP account, you still very much do have it, just that it is now disregarded for UC purposes (although I accept there may be previous case law to the contrary). Further, if we are to accept that you have deprived yourself of that capital and in fact no longer have it, how is UC to treat this pension when you later withdraw it? Are they to then ignore it having previously ruled you no longer have it, or does it miraculously reappear becoming "un-deprived" and they penalise you twice, once for originally depriving yourself of it and again for then drawing upon it?

Anyway, in your circumstances I would continue to make small regular payments for your £2880 annual pension contribution whilst still on means tested benefits, and argue they are made from your unearned income so cannot be considered as DoC.

Altior

Thanks, there is the motivational aspect too. My primary motivation (and since I'm qualified, I'm aware of the advantage) is to benefit from tax relief, especially as this is likely to be the last time I earn income through work in a tax year. The DWP agrees with this as I have been placed in the support group. I'm also way above the capital limit for applying for MT benefits, (currently 10s of £Ks), so the contributions won't have an immediate or short term impact on any means tested benefits. I'm also going to add another layer of safety (most likely) and have a level of capital when I apply that I would still qualify for UC if the pension contributions were treated as notional capital. So the worst that could happen is a nominal fine and a small overpayment to pay back.

Call it cynical maybe (I'd like to think it was prudent), but I've run the numbers in all scenarios and there's no real benefit to me being above £6K capital when I apply, as I already get SG for ESA and won't get CT support unless I'm under £6K. I will get there by paying off legitimate, long standing debt.

Grumpy_chap

https://forums.moneysavingexpert.com/discussion/comment/81914702#Comment_81914702

I don't know the rules around making the pension contributions (£2,880 per year) and UC, however your definition of "

the common meaning of deprive/deprivation should mean to no longer have something

"

could equally be "

the common meaning of deprive/deprivation should mean to no longer have access to something

"

Consider a very simple example of a naughty child so the parent takes the toy away and puts it on the top shelf. The child still has the toy but does not have access to the toy.

Altior

I appreciate it's possibly an abstract discussion, however I feel it would be very difficult to argue that an individual on MT benefits, with no earned income cannot contribute to a pension. It's a million to one to get to that point, as my primary purpose IS to take advantage of tax relief that the government purposely provides for non workers. I'm only concerned about DoC in case someone misinterprets my intention (which I would never discuss in a real case). Plus they'd have to prove that I am aware of the capital limit in the first instance, and planning months ahead of an application! I am fully aware of the limits to pension contributions in the fiscal year, and that's front of my mind.

NedS

https://forums.moneysavingexpert.com/discussion/comment/81914855#Comment_81914855

The common definitions all use the term 'prevent':

Oxford Languages say: Deprive - prevent (a person or place) from having or using something.

Cambridge dictionary says: Deprive - to prevent someone from having something, especially something that they need.

How have you 'prevented' yourself from having access to it by placing it in a pension when you can then withdraw it from that pension at any time (after age 55/57)? I grant you may have deprived DWP of consideration of the capital, but that is by their own rules and it was never their capital in the first place. There is nothing in legislation to indicate that age should be a factor (e.g, under 55/57 or over 55/57) so it's difficult to see how one can argue you have prevented access to it (without discriminating based on age).

I can see decent arguments on both sides and I believe there is relevant case law.

I think in @Altior's case of paying small regular payments from unearned income into a pension for the primary purpose of receiving the tax relief, and with a history of so doing, there can be no question of DoC having occurred.

I came across a case where a person was made redundant with a large payout (£70k gross) and chose to pay £60k into their pension retaining £10k in capital was referred to a DM for a decision on DoC. The claimant stated they had been advised by DWP that paying into a pension was a sensible use of a redundancy payment as a DWP official had given them a Money Advice Service leaflet advising such. The primary reason was to avoid a high rate of marginal tax. They were asked how they intended to support themselves to which they replied that they had to balance providing for their family's future with providing for the hear and now, and that they felt retaining £10k to cover living expenses until they were able to get another job was financially prudent (no previous history of unemployment). The fact they had retained £10 in capital (not £6K or less) appeared to indicate they had little knowledge of the benefits system and did not clearly demonstrate intent to claim more means tested benefits. The DM allowed the case and concluded no DoC had occurred. So I think it can be quite dependent on the circumstances of the case.