Pension whilst on Benefits

inspirespirit · 23 January 2019 at 6:14PM

Looking for a bit of advice. I help my ex husband with sorting out his finances etc. as he has had two strokes which has left him disabled and not really able to cope with stress or anxiety. He is 62.
He lives alone and receives ESA and PIP and Housing Benefit.

Unbeknown to either of us he has been contacted to say he has a pension pot of 24 thousand.

I have read all through the gumph they sent and it states you can take smaller pots of the money to avoid paying lots of tax which seems good advice so I was going to advise him to take out 4 yearly amounts of 6 thousand pounds.
Does anyone know if this is doable? Someone has said he will have to take out the whole lot in one go and all his benefits will stop. I know that would stress him immensely as it took us ages to get all his benefits sorted after his strokes. The forms and red tape are horrendous for anyone let alone people who struggle.

Obviously he wouldn't want to do anything illegal and it all needs to be transparent but it also needs to be stress free so that I can just handle it on his behalf without worrying him too much. He is already freaking out about it all.

I believe the first 25 per cent is tax free which is why I thought 6k would be a good amount to take out. He is in dire need of new furniture/new bed/special chair and possibly a mobility scooter which the money would be used for.

Linton · 23 January 2019 at 6:25PM

Assuming this is a straightforward DC pension with no guarantees or special factors....

Yes he could legally withdraw 4 annual tranches of £6000. However whether his current pension scheme would permit it is something you will need to ask them. If not it is relatively easy to transfer the pension to another provider who would support drawdown.

After the first tax free 25% the remainder would be taxed as income, along side any other taxable income he may have, when drawn down. There may be some affect on his benefits, I dont know. I believe neither PIP nor contributory ESA would be affected. But again this is something you should check.

xylophone · 23 January 2019 at 6:34PM

See below re pension freedom and benefits.

https://www.gov.uk/government/publications/pension-freedoms-and-dwp-benefits/pension-freedoms-and-dwp-benefits

Marcon · 23 January 2019 at 7:09PM

Check with a benefit specialist how his benefits might be affected - try https://www.turn2us.org.uk who are excellent.

tacpot12 · 23 January 2019 at 9:14PM

I thought you had select £6000 as the withdrawal amounts because the is the amount of capital you are allowed to have without losing any ESA or Housing Benefit. He would still get some ESA and HB if he had capital of less than £16,000 but it would be reduced. I would agree with your view that it would be best to avoid anything that might result in his benefits changing.

It is quite possible that the pot will continue to increase in value, so he might well be able to take 5 yearly amounts of £5000, or so. This might be better if he already has some other small amount of savings here and there. You need to make sure that his total savings in bank accounts doesn't exceed £6,000.

inspirespirit · 23 January 2019 at 10:06PM

5 yearly amounts of 5000 would also be good. I chose 6000 because it stated the first 25% would be tax free and I was thinking six grand would be able to buy him a really decent disability bed, chair and scooter. The only reason Im dealing with it is because he is the father of my son and I want to make his life less stressful as possible. He freaks out over the tiniest tiniest of things, like a phone ringing. He also pays for a cleaner out of his disability money and I make him meals that he can stick in the microwave. Any slight change to his routine totally freaks him out. Anyone else would have been over the moon getting this money but it has completely thrown him.

msallen · 24 January 2019 at 11:36AM

It sounds as though he doesn't need this pension, so I would suggest he doesn't draw on it, just leaves it to grow further over time.

It will be there should he need if his circumstances change later in life, or if not it will be a very tax efficient way of him leaving it to your son.

If you do decide on this course of action, you will have to look at where to leave it invested.

msallen · 24 January 2019 at 11:39AM

I should add that I know nothing about benefits, but it is possible that any means tested benefits he is on would assume that he was able to draw an income on the pension and include that in their calculations. I don't think it would be much on a £24K pot, but if this was a problem he could just drawdown that amount.

Pension_Geek · 24 January 2019 at 11:55AM

msallen wrote: »

I should add that I know nothing about benefits, but it is possible that any means tested benefits he is on would assume that he was able to draw an income on the pension and include that in their calculations. I don't think it would be much on a £24K pot, but if this was a problem he could just drawdown that amount.

I used to do calculations like this all the time at my previous employers. We would use the GAD rates to assess what amount a person could get if the annuitised the pension. Exactly what the impact was on the persons benefits wasn't clear, but I was told certain peoples benefits were reduced by this amount even if they didn't take income (I worked on a drawdown plan).

SnowMan · 24 January 2019 at 2:10PM

At the moment any untaken pension will be ignored for benefit purposes, as your ex-husband is below State Pension Age.

In 4 years time when he reaches SPA at age 66, then they will assume for means tested benefits purposes that any untaken pension has notionally purchased an annuity, so it will have an affect on benefits then. And at SPA he will start drawing his State Pension and will be able to claim pension credit instead of ESA, provided his income and capital are low enough at that time (including the notional annuity from any remaining untaken pension).

Working aged means tested benefits such as income based ESA (which I'm assuming he's receiving) aren't affected if capital is below £6,000. And between £6,000 and £16,000 of capital the ESA benefit calculation assumes the capital is producing tariff income of £1pw for each £250 of capital above 6K. If capital is above 16K he won't qualify for any income based ESA or housing benefit, but any contributions based ESA will continue (only regular pension income above £85pw affects contributions based ESA)

The plan to take out chunks of money from the pension, keeping his capital below the 6K capital limit for benefits is sound. The ad hoc lump sums withdrawn from defined contribution pensions are treated as capital for benefit purposes, but are not treated as income for benefit purposes. For tax purposes it is treated as income (the 75% part) but it may fall within his personal tax allowance.

The one thing to watch out for is that if £6,000 is taken out each year, then the DWP could treat that as a regular income in which it would be treated as income for benefit purposes which would be a major problem. Ad hoc lump sums are OK but where the dividing line between ad hoc lump sums and regular withdrawals falls is a grey area, the pension freedoms are too new for there to be practical experience of this.

And money taken out of the pension and spent could be treated as 'deprivation of capital' which means he would be treated as still having the money for benefit purposes but the bed, chair and scooter and any normal expenditure won't be an issue. So no obvious problems here.

If the money is taken out as flexi-access drawdown (FAD) rather than as ad hoc cash chunks (UFPLS) then the DWP assume that any pension left in the drawdown pot will buy a regular income, which will affect benefits, so it is important that the money is taken out as chunks of cash (UFPLS).

PIP is not means tested at all so is completely unaffected by the pension, regardless of how it is accessed.

enthusiasticsaver · 25 January 2019 at 1:49AM

msallen wrote: »

It sounds as though he doesn't need this pension, so I would suggest he doesn't draw on it, just leaves it to grow further over time.

It will be there should he need if his circumstances change later in life, or if not it will be a very tax efficient way of him leaving it to your son.

If you do decide on this course of action, you will have to look at where to leave it invested.

He needs it for new furniture and mobility scooter. It makes sense to stagger the drawing of it from a tax point of view. He has health issues and could do with using some of it now.

Pension whilst on Benefits

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