The introduction of flexible pension benefits in April 2015 has opened up a whole new perspective of pensions and how funds can be accessed upon retirement and perhaps even redefined retirement.
However, at the same time there are areas that need to be highlighted as people take these pension funds. Much has already been said about the immediate taxation of benefits and peoples understanding of the amount of tax paid (and potentially reclaimed) but there is still limited discussion about the effect that taking these pension benefits could have on state benefits and care costs.
Many state benefits will look at a client’s income and capital savings when considering their eligibility for support such as housing benefit and pension credit. This is a rough breakdown of what may be affected by your pension decisions. The lists and benefits mentioned here are not exhaustive and others will also be affected.
Employment and support allowance and jobseekers allowance will be affected by any pension income that you take over certain levels. However, if you do not take any pension income there will be no consideration and as this is an income related benefit, any lump sum taken from the pension (e.g. tax free cash) will be excluded as this will deemed to be a capital payment.
Housing benefit, pension credit, universal credit and income support may all take into consideration any pension funds that you hold (excluding tax free cash) or have taken depending on whether you are over or under the qualifying age for pension credit.
Under – any pension funds left untouched will not be considered for these benefits. If any pension funds are taken in the form of income or lump sums, these will be considered within the calculation of benefits
Over – once you have reached the qualifying age for pension credit all your pension funds can be taken into consideration when calculating benefits irrespective of whether they are in payment or not. If you have decided not to take an income from your pension funds the DWP will calculate a notional income amount to take into consideration based broadly on the purchase price of a lifetime annuity. The rates and type of annuity that is used for these notional annuities is open to the local authority and can be taken from a pension provider or from the Government Actuary’s Department. If you did take an income from your pension funds the DWP would take into consideration the higher of the income that you take and the notional annuity. Any taxable lump sums taken from the pension funds will be taken into consideration as capital. Also, depending on the regularity of pension withdrawals it may be that the DWP could treat irregular pension income withdrawals as capital sums instead.
Long term care costs. The Charging for Residential Accommodation Guide (CRAG) has been replaced following the Care Act 2014 which introduced the Care and Support Statutory Guidance. This guidance is for the local authorities and considers the new options introduced by the pension reforms. Any sums taken from the pension and reinvested into other investments are to be treated under the rules for that new investment in terms of benefit calculations. If there is no, or minimum income, being taken from a pension fund the authority can use the notional income rules to determine income levels for the calculation of benefits. Where income is being taken under the new rules at a higher level than a notional income would produce, they will use this higher level.
Deprivation Rules. There may be circumstances where income and/or capital has been removed from your immediate estate which may be considered by the authorities to be deliberately moving the money to ensure it is not taken into consideration for the calculation of benefits or care home costs. In simple terms if it is decided that you have deliberately removed the assets or removed the income you will be treated as though you still have that income and/or capital in all calculations.
The local authority will need to determine when they consider a deprivation has taken place. For example, if a client took and then gave away a lump sum from their pension immediately before submitting themselves into care, it will be up to you to prove this was not planned with the intention to exclude this money in the calculation.
The authority will also have to consider circumstances where the money has not been hidden but where income has been converted to capital. In these circumstances is this putting you in a better or worse position for the care home cost assessment?
The points laid out above cover some of the main benefits but are not extensive and the individual’s circumstances will need to be considered for each case. Further details concerning the new pension benefits and implications can be found on this link https://www.pensionwise.gov.uk/benefits.