Defined pension and benefits

[silverback12345]

Hi all,
I hope someone can offer some advice on the possible effects of a pension lump sum and it's affect on benefits. I have a defined contribution pension and have learned I may be able to access it because of ill health and not being able to work. I had an appointment with pension wise this is where I learned it could be possible to access my pension before 55. My career was ended many years ago due to ill health which has continued to decline, I will never be able to work again. I am in receipt of ESA contribution based and in the support group. I receive housing benefit & council tax reduction I know these are means tested. We do receive child tax credit I am not sure if this would be affected.

We have no savings and the pension is not large it's present value it is just under £16k. My concern is the pension has lost 7.7% in the last year and only has an estimated value of £40 per month at retirement, this is a drop of 20% payment per month in the last two years.With such a small estimated monthly amount it's purchase value at retirement due to inflation would be very low. This is why I am considering a 25% lump sum but I don't know the effect on benefits I have tried researching and think there would be no effect when taking a lump sum but I am not completely sure.

We would remain under the £6k savings limit with the lump sum but I am not sure about the affect on benefits if I then took payments of say £1k a year I think this would classed as income.
I want to use the money to either have my kitchen adapted I need a wall mounted oven, units and work top raised, garden altered as we struggle to maintain it or pay off a credit card debt. Any advice would be welcome.

[2222]

Where does the £1k figure come from? Drawing money out of savings perhaps? I don't think that's treated the same as income at all. I know nothing about benefits, though.

by the way, is the savings limit only £6k? I have the figure of £16k in mind for some reason.

Finally, are you sure this is a defined pension, not money purchase?

[silverback12345]

Thanks for the reply.
The £1k figure comes from the remaining pension after taking the 25% lump sum, I can choose how I receive it basically take what I want when I want.

The saving limit of £6k is for means tested benefits any savings above that amount a certain amount of benefit is removed. The £16k is the limit for eg housing benefit if you have savings over this you will probable not receive means tested benefits.
This is how savings are calculated.
"If you or your partner have any savings or capital of between £6,000 and £16,000, the first £6,000 is ignored.
The rest is treated as if it gives you a monthly income of £4.35 for each £250, or part of £250."


The pension is defiantly a defined pension I have all the paperwork and have confirmed this with the provider.

[2222]

Thanks for explaining the benefits limits.

"The £1k figure comes from the remaining pension after taking the 25% lump sum, I can choose how I receive it basically take what I want when I want."

That is remarkably flexible for a defined benefit pension.

Without seeing the paperwork, I can't see why a defined pension should have gone down by 7.7% last year. It should have been index-linked up to a limit of 5% a year, so there's something very odd happening. Do please get answers from the scheme about any questions you have before making any irrevocable decisions.

[silverback12345]

Thanks for the reply. I have spoken to them and apparently I have several choices I can leave the pension as is,take it all as a lump sum,buy a annuity or transfer to another provider.
The other choice is to take payments as and when I like and in amounts of my choice I would have to transfer to an income drawdown. My problem with this is I have to control my own choice of investments they never mentioned this until I said I wanted to claim my pension.

The drawbacks are If I choose to have an annuity it will be regular payments and counted as income then calculated in benefits.I would probable lose most of the pension. If I take it all as a lump sum the first 25% is tax free but I will have to pay a quite a lot of tax on the rest.I would be over the £6k limit and have benefits reduced. Taking the pension as a full lump sum would also mean I would have to be very careful how it was spent or I could be accused of deprivation of capital.

I had my annual pension report for 2018/19 and the pension had lost approx £1300 roughly 7.7% from 2017/18 it is an old Hamilton pension and as far as I know not index linked. I will need to consult with the local council and see how I would be affected and possible the DWP.

[2222]

You are clearly asking all the right questions.

It really sounds as though you have a pension that is investment-based, rather than being defined as a fixed annual amount, with fixed increases. If it is investment linked, you have to expect ups and downs in value, especially as 2018 saw all the main markets drop in value.

You can usually ask for it to be moved to lower risk investments, if you think where it is is too risky, but lower risk implies lower expected returns in the long run.

Leaving aside the effect on benefits, taking the whole pension as a lump sum simply gives you the question of how to invest it yourself.

[Wylderose]

Silverback, pension drawdowns under £6K are not assessed as capital on your claim, but if your combined savings (Bank, savings, ISA's) amounts to over £6K, then you will be looking at a reduction in housing benefit due to capital. Over £10K could affect your council tax, dependant on which Local authority you live in and their local council tax rules and over £16K will exclude you from benefits entirely.

If you take any part of your pension as a paid amount (monthly/annual income), then this will be assessed in your ESA C (reducing the amount you get) and may also have an effect on your housing benefits claim