Diving into retirement could cost savers their benefits
People who use retirement freedoms to dip into their pension fund at age 55 could end up losing their benefits, warned Sir Steve Webb, LCP partner and former pensions minister.
According to Webb, as leave programs end and the extra £ 20 on universal credit payments end, people over 55 who are still working could worry about their jobs or find themselves made redundant.
It could put a strain on people’s finances and cause them to dip into their pension funds as part of the Freedom of Pensions scheme, to recover.
About 1.6 million people aged 55 to 65 are receiving benefits, such as universal credit or employment and support allowance, and this number could increase.
But in a new article, titled “How Trying to Wrong Retirement Freedoms Could Cost You Your Benefits,” LCP and fintech firm Engage Smarter warned that dipping into the pension pot could mean dipping into valuable perks. .
The 26-page article examined how the means-tested benefit system for under-retirement and over-retirement age interacts with different choices of retirement freedom, such as the withdrawal of income by direct debit or the withdrawal of a lump sum.
The newspaper said: “The problem faced by individuals who have to make these choices is that the benefit rules are complex and different retirement choices – like leaving the money where it is, cashing it in full, making a pension. levy or buy an annuity – can have different implications for benefits.
“Some choices may be better than others, but the saver is unlikely to know the rules and neither is their pension fund. There is a risk that more and more people will make bad choices about lending. access to their retirement and suffer financial harm as a result unless something changes. “
Among the various options, one of the most dangerous is the temptation to use the pension pot as a bank account.
According to the newspaper, when people under the legal retirement age withdraw money from a pension fund, it can affect their entitlement to benefits in two main ways.
The first is that if they end up having more savings, it increases their “capital” when valued for profit. Therefore, those with more than £ 16,000 in capital are excluded from universal credit, while even having £ 6,000 in capital means that help from English local authorities for municipal tax bills can be stopped.
The second potential problem is that, if people use their pension to buy regular income through an annuity, each pound of annuity income could be deducted from their benefit income.
Similar problems may apply to people over retirement age receiving a retirement credit or housing allowance, although the rules apply in a different way (see table).
Source: LCP / EngageSmarter paper
Co-author Matt Gosden, founder of EngageSmarter, working with strategy consultant Peter Robertson, emphasized the point in the document.