People between the ages of 55 and 64 are warned not to monetize their pension savings under pension freedom without reaffirming their impact on the benefits they receive.
Between October 2019 and March 2020, 132,278 of the people in this cohort withdrew their private pension savings altogether. This is a new report produced by former Pension Minister and LCP partner Steve Webb.
However, the complex Means test rules mean that anyone who does this can reduce their benefit income and put them in a worse financial position. paper, How your profits will be sacrificed if you make a mistake in your pension freedomCo-authored by Matt Gosden of Engage Smarter and consultant Peter Robertson, explains that under the age of 55, money trapped in pensions is ignored by the means-tested benefits scheme.
For example, in theory, even if you have a £ 1m pension pot, you can still receive Universal Credit. Money in the pension pot is ignored even if you are 55 and have not yet reached your pension age.
However, when you withdraw money from your pension, the impact depends on how you receive it. Means-tested profits distinguish between two types of money. Income received on a regular basis. Capital or savings when various rules apply.
If you earn regular income, such as by purchasing a pension, when you access your pension, this income will be included in your total income when you assess your benefits. If you take the entire pension as a lump sum and put it in your savings account, it will be counted in capital when eligibility is determined.
When you transfer your annuity to a drawdown account, one-time lump sum withdrawals may be treated as part of your total capital, while withdrawals in the normal pattern are treated as income.
The same principle applies to people over the pension age, except that at this point the system no longer ignores the money sitting untouched in the pension pot. There are no rules that force you to withdraw money, but authorities consider you to be earning money from pristine money.
“There are more than 1.5 million people in the 55-65 age group receiving Means test benefits,” says Webb. “If any of these receive money from their pensions, this can have a negative impact on their interests, probably because they are under financial pressure.”
However, he warns that no personalized advice on what the saver should do in this situation is provided on a daily basis. It’s good to let people choose when and how to receive their pension, but there is no doubt that people need more help and advice.
“This problem will be exacerbated as millions of people are starting to make the right pots through auto-registration,” says Webb. Check out pensions-and-benefits.uk to see how you can be affected using this new calculator