Universal credits v's pension

doshnumpty · 14 December 2019 at 5:15PM

Hi
I am currently in receipt of Universal Credits due to having a limited capacity to work from cancer treatment over the last 4 years.I have a small pension and I'm considering cashing it in.Approximately 1575 will be tax free and the balance of 4725 will be taxable, can someone advise me how this will affect my UC payment? I understand I will pay tax on the 4725 but will be able to claim it back as it will be under the personal tax amount.
We need the money to do some repairs on our house
Thank you

calcotti · 14 December 2019 at 6:04PM

I think the whole sum will be treated as capital. If the whole sum of £6300 is your only capital then it will have very little impact on your UC been while it is in your account. The first £6,000 is ignored and for the £300 there will be a deduction of £8.70/month. The capital will be assumed to reduce over time but so this deduction will disappear after a while but I don't know, offhand, the rate at which the capital assumed to reduce.

As soon as you have spent some of it for house repairs let UC know your capital has dropped below £6,000 and then there will be no impact on your UC.

Note that the assessment of capital is the amount in your account on the last day of your assessment period. This means that if the money comes in early in the assessment period and has gone out during the assessment period there should be no impact. I recommend that you take some photos of anything you are going to get repaired and make sure you get invoices. This is necessary so you can demonstrate to DWP that it was reasonable for you spend the money.
If this pension is your only income other than UC for this tax year there will not be any tax to pay.

NedS · 14 December 2019 at 6:36PM

I'm guessing (in other words I do not know for sure), but I would have thought the tax free portion (£1575) would be treated as capital and the taxable portion (£4725) would be treated as unearned pension income. Initially the portion you receive after tax has been deducted would be treated as unearned income in the AP in which it was received. When you claim the tax back, that will also be treated as unearned income, again in the AP the tax rebate is received.

Clearly my view differs from Calcotti above. Are you aware of any guidance/regs as to which is correct? My view is formed on the basis that if HMRC treat it as taxable then it's income not capital, but I recognise DWP and HMRC are different departments and can have different views.

For me, I'm pretty clear that any tax rebate is treated as income in the AP in which it's received. Therefore it makes sense that the amount the tax was derived from must also be income (as we don't pay income tax on capital). Income only becomes capital once it remains in the possession of the claimant after the end of the AP in which it was received.

huckster · 14 December 2019 at 6:40PM

The pension company are quite likely to report the taxable amount to HMRC and UC will receive the information through the RTI feed.

If this does happen, it will be treated as earnings in the assessment period it is reported.

Ask the pension company about their HMRC reporting of such payments.

Agree with Neds view on this.

Alice_Holt · 14 December 2019 at 6:58PM

NedS wrote: »

I'm guessing (in other words I do not know for sure), but I would have thought the tax free portion (£1575) would be treated as capital and the taxable portion (£4725) would be treated as unearned pension income. Initially the portion you receive after tax has been deducted would be treated as unearned income in the AP in which it was received. When you claim the tax back, that will also be treated as unearned income, again in the AP the tax rebate is received.

Clearly my view differs from Calcotti above. Are you aware of any guidance/regs as to which is correct?

My view accords with calcotti
The sum withdrawn will be treated as capital not income.

This is from the UC Decision Makers Guides:

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/778262/admh5.pdf

“H5174 Whilst a claimant’s pension pot is held by the pension provider then the value of the right to that sum falls to be disregarded as capital for the purposes of UC1. Pension flexibilities allow people to withdraw money from their pension pot. This is known as a drawdown. If the claimant has withdrawn money from their pension pot then a determination has to be made as to how this is to be treated for the purposes of UC.

H5175 Where a claimant chooses to
1. take ad-hoc withdrawals or
2. take the whole sum
then the amount withdrawn falls to be treated as capital. (see ADM Chapter H1).

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.”

Logically the tax rebate would be treated in the same manner. But I can't find confirmation of that, and UC and logic are poor bedfellows.

calcotti · 14 December 2019 at 7:15PM

Thanks Alice - that was indeed the advice I remembered (didn’t have time to check it though when I posted earlier).

In respect of any tax rebate it will (illogically in this situation) be treated as income IF the OP has been in employment at any time in the tax year to which the rebate relates. if not it is treated as capital.

See

H3022 An actual repayment to the claimant of
1. income tax or
2. NI contributions
by HMRC in respect of a tax year in which a person was in paid work is treated as employed earnings1. Where the paid work was from carrying on a trade, profession or vocation then the repayment is treated as S/E earnings (see ADM H4131).
Note 1: Repayments of income tax may include tax relating to other sources such as unearned income. As long as the claimant was in paid work in the tax year the repayment relates to, then the whole repayment is treated as earnings.

This is one of my ‘hates’ about UC. I consider it can be very unfair to claimants.

For claimants in employment while claiming UC it is logical in respect of Tax todo with their earnings in that if they paid more tax earlier, thereby reducing their earnings, they got more UC so it is logically to reduce UC if the tax is refunded. However for claimants who were not claiming until work stopped (or their earned income reduced) they are being repaid tax because it is is no longer due but they still get a deduction from UC meaning they are effectively still taxed.

The rules are completely illogical, in my opinion, taking in tax refunds from other items as earnings.

Under legacy benefits income tax refunds were always treated as capital.

huckster · 14 December 2019 at 7:29PM

As the amounts will most likely be reported to HMRC and come through on the RTI earnings feed, Doshnumpty will have to have documents from their pension company ready to provide to UC via the Job Centre.

Then UC will have to consider these, in line with the information that Alice and Calcotti have pointed to.

I was forgetting that drawdown of pensions should be treated capital and it is only regular pension payments that should be treated as earnings. The problem is the RTI feed and having to retrospectively deal with the statement after the claimant has received no award.

Alice_Holt · 14 December 2019 at 7:51PM

calcotti wrote: »

This is one of my ‘hates’ about UC. I consider it can be very unfair to claimants.

Indeed.

One of my pet 'hates' is the seeming inability of DWP employees to correctly apply their own regulations and guidance.
It would not surprise me if the OP comes back on this forum, having had his pension sum incorrectly treated by UC.
Just think of how difficult it is to get incorrect RTI info corrected. Even if the claimant produces proof, DWP staff still refuse to accept they have discretion to amend incorrect earnings info.

In a (more) ideal world, it really shouldn't be up to charities like Citizens Advice and CPAG to rectify DWP errors for claimants. The DWP should be geared up to get things right first time. Sadly they are nowhere near, and the lengthy tribunal waits exacerbate and magnify the impact of DWP errors for claimants.

OP - I would prepare the ground on the UC journal prior to taking the pension sum. Tell UC what you are going to do, quote the relevant paras above, and get a DWP employee to agree the correct treatment in advance. Keep screenshots as some UC pages can suddenly disappear.

If the DWP still get it wrong - get your MP on the case, raise a complaint, and see if your local advice agency can do a judicial review pre-action letter for you.

Edit: Huckster has given the OP some very helpful tips whilst I was (slowly) typing this. Prepare the ground.

calcotti · 14 December 2019 at 8:37PM

Alice_Holt wrote: »

One of my pet 'hates' is the seeming inability of DWP employees to correctly apply their own regulations and guidance..

Indeed. There are two types of issue
1) Those that result from the design of UC as embodied in the legislation and
2) Those that result from very poor administration, these in turn appear to have two causes

Insufficient knowledge among staff ( and probably not enough staff), and
The amount of manual intervention that appears to be required to correct claimant awards because the computer system doesn’t deal with lots of things. These manual interventions have to be made every month

The subject of this thread appears to not be that is likely to require manual nterventin to resolve.

As you say support agencies should not have to be dealing with this and, more alarmingly, many claimants will not have such support and therefore their awards may be wrong without them knowing - and of course if they are overpaid DWP can claim the overpayment back even if it is their fault.

Dazed_and_confused · 15 December 2019 at 12:10AM

Just think of how difficult it is to get incorrect RTI info corrected.

What is actually wrong with it though?

The pension company have a duty to report taxable earnings or taxable pension income through RTI. The op is choosing to take their pension fund all in one go so the pension company will have to report what is paid.

I appreciate that there may need to be a discussion with DWP to ensure that the correct UC is paid however there is nothing actually wrong with the information the pension company will be reporting under RTI.

If they didn't report it under RTI then how would HMRC know what had been paid and what tax had been deducted. And then how would the op get back any excess tax deducted?

calcotti · 15 December 2019 at 9:10AM

Dazed_and_confused wrote: »

What is actually wrong with it though?

I don’t think Alice was suggesting there was anything wrong with the RTI information in this case. She was citing the difficulty claimants have getting DWP to correct UC an award based on incorrect RTI information as an example of the operational difficulties that UC claimants face - partly because DWP staff sometimes fail to follow their own guidance.

Universal credits v's pension

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