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PENSION ADVICE STRATEGIES

Synopsis: The increased retirement benefit flexibility, due to be introduced from April 2015, will mean that advisers need to have an understanding of the potential impact on means testing.

Date posted: Friday, June 13, 2014

It is important to understand how uncrystallised pension rights impact on a member’s ability to claim certain means tested benefits, especially in the light of the proposed new retirement benefit flexibility from next April.

This Bulletin will focus on the current treatment of uncrystallised pension rights.

When considering means testing, you should be aware that the DWP use the concept of the ‘amount of notional income’ that a claimant is entitled to. For occupational pensions, benefits are generally only taken into account from the scheme’s normal retirement age, but for other pensions, notional income is considered from age 55.

The DWP guidance to Decision Makers (DMs) states ‘DMs must consider evidence from pension fund holders when deciding the amount of notional income’. Where a pension allows income drawdown, the notional income is deemed to be the maximum income permitted under legislation, i.e. currently 150% of GAD.

However, with the advent of retirement benefit flexibility from next April the concept of maximum GAD will, we presume, fall away as capped drawdown will no longer apply. However, the Government cannot afford to ignore the capital (uncrystallised benefits) that an individual has accumulated in their pensions, if it means they would otherwise be able to claim state benefits. The way in which the new retirement benefit flexibility will impact upon the way in which notional income is calculated, needs to be considered.

In a question and answer session with the Work and Pensions Select Committee on 30 April 2014 the Secretary of State for Pensions, Steve Webb, clarified the Government’s position regarding the impact of the new pension tax rules on means testing, ‘we need to think through—for all of the different types of capital and income people will have, and for all of the different things we means test, which is Pension Credit, Housing Benefit, social care and all the rest of it—a consistent approach to these things. Coming back to my reply to Debbie, the intention is not to fundamentally change the way we treat these things.’

So, it is possible the notional income could be based upon an annuity rate, but perhaps it is more likely that the DWP will apply their existing basis for calculating notional income from capital sums.

Currently, the DWP has a formula for calculating a claimant’s notional income from capital. Once an individual has capital in excess of the capital disregard (typically £10,000, but can be a lower disregard of £6,000 for certain benefits) it is deemed to generate an income of £1 per week for each £500 (or part thereof) of capital. So an individual who has capital of £10,000 in excess of the appropriate capital disregard, would be treated as having a notional income of £20 each week , a return of over 10%!

As yet, how the DWP will deal with this, is not known. However, it is unlikely to be addressed in the proposed Pension Tax Bill due in the autumn and will more likely be addressed in specific DWP Regulations, issued later in the year.

So, what is the alternative for those who are on, or potentially will be on, means tested benefits and have relatively small uncrystallised pension rights?

If you are being adversely penalised by having uncrystallised pension rights, one option is to crystallise these. Once crystallised, what should be done:

 an obvious option would be to clear any outstanding debts, perhaps with the exception of a mortgage which in itself could result in higher benefit payments

 alternatively, securing a lifetime annuity with some of the pension rights may be an attractive option. This is a low maintenance solution and will generate an income which will impact upon benefits, but the income is secure and, more importantly, the income is only assessed at face value, and as such has a much less detrimental impact upon the benefits received.

The main means tested benefits that are likely to be considered include:

  •  Pension Credit
  • Income-based Jobseeker’s Allowance
  • Income-related Employment and Support Allowance
  • Working Tax Credit
  • Child Tax Credit
  • Housing Benefit

The new Universal Credit is replacing each of these benefits, except for Pensions Credit and is still in the process of being rolled out nationally.

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