Have pension freedoms “benefited” the poor?

Gareth Morgan is CEO of Ferret Systems

Gareth Morgan has written to us via linked in to remind us his submission to the Work and Pensions Select Committee is now public . You can read it in full here   bit.ly/3d9PpyW

There were 54 written submissions but only 4 that mention state benefits,  and only one of those from the pension industry. Gareth remains a lone voice calling for better information for those on low incomes and reliant on state support.

The submission is too long to feature uncut , so here are some salient points and some charts that make the points vivid and real, all text and charts are Gareth’s and form part of the Ferret Systems submission.

My comments are in italics

Why low earners are left behind by advisers

Most of the pensions’ industry, certainly the advisers working within it, appear to have
little interest in low-income savers and even less interest in how those with small
pension savings make use of them.

Personalised advice is expensive and beyond the means of most people, yet it is the only
form of advice which actually uses real numbers when considering the circumstances of
individuals or families.

Even the prevalence of the description of pension savings as ‘wealth’, within the
pensions industry, makes it clear to the average person that this is not meant for them.
The disproportionate emphasis within the industry on issues such as lifetime saving
limits and higher tax reliefs reinforces this situation.

This is more than unfortunate, particularly in decumulation, as smaller pension savings
often contribute disproportionately to vital day to day needs of older people, and the
alternative ways in which they can be accessed may have quite different results in the
overall income of theses savers, than the same choices have for more prosperous

The iniquity of means tested saving before the pension freedoms

Until the introduction of the pension freedoms in 2015, many low-income pension
savers saw little, or no, increase in income from many years, sometimes a lifetime’s,
pension contributions.

Where their only income in retirement was made up of the state pension and their
occupational (DB) or defined contribution (DC) pension savings, they almost inevitably
lost a substantial part of both in practice.

DC savings, at the levels involved, inevitably had to be used to purchase annuities. These
regular incomes, as with occupational pensions, were taken into account in the
assessment of any means-tested benefits

The impact of means testing for a single person is illustrated here

The benefit of pension saving is even less for some couples

In this example, there is no income increase whatsoever across the whole of the median
range and little real gain across the mean range, even when Pension Credit has ceased
to be paid.

Freedoms bring choice but…

The pension freedoms have brought something unusual to the world of the benefit
claimant – choice. Instead, savers are offered a wide range of products and product
types. However, in the vast majority of cases, without any information on how they will
be affected by their choice.

In this example, the Pension Credit rules for post-2016 pensioners are used so
the calculation does not include Savings Pension Credit. It also models a situation where
rent of £120 per week is paid and council tax of £21.15 per week. Not only does this
reflect the housing situation of many low-income pensioners but it illustrates the fact
that increasing income may have a simultaneous reduction applied across different

It shows that although a full new state pension (line B – £179.60) may, if there are no
additional needs, just lift a recipient off Pension Credit, it does not necessarily remove
entitlement entirely. Those on the older basic state pension alone (Line A – £137.60), still
retain Pension Credit entitlement. Housing Benefit and Council Tax Reduction
entitlement continues, but reduced by the regular pension income.

The same erosion of state benefits by pension saving happens for couples

While occupational pensions form the largest part of these payments, and are less
flexible in usage, many of the personal schemes could be treated very differently if they
were used for irregular drawdown of capital instead of regular income.

The obscure calculation of  benefit entitlement when regular drawdown is taken

Regular drawdown is in a slightly different position when considering the way in which
its income is assessed. Unlike the above, there is a retained savings valuation to
consider as well. The effect of unused savings has to be considered when looking at
both regular and irregular drawdown.

Gareth’s paper explains in detail the complex interaction between capital and income in the assessment of regular drawdown for those claiming benefits.

Expecting a pension saver to understand the consequences of taking different amounts
of regular withdrawals in this type of situation, without individual advice or guidance is
unrealistic. Savers are not notified of the value of the notional income from these
savings when they change.

The advantages of irregular drawdown

Where, however, irregular, or ad hoc, drawdown from pension savings take place, then
the withdrawals are treated as capital, rather than income, and another different set of
rules apply under the means-tested benefit regulations.

Making irregular withdrawals from pension savings may create a situation where the
tariff or deemed income could affect benefit entitlement. Where the amount withdrawn
is such that the held capital is below the level at which capital generates a notional
income, then there is no effect upon the means-tested benefits. This can be illustrated
by considering the situation where capital is withdrawn, up to the full amount of

The graph below shows the effect of withdrawing larger amounts of capital upon benefits
entitlement in a monthly basis.

The eye is inevitably drawn to the cliff-edge income drop showing passported Housing
Benefit and Council Tax Reduction stopping immediately, at the point where Guarantee
Pension Credit has been tapered away to zero, by increasing notional income, and the
£16,000 capital cut-off for those benefits comes into effect.

Look, however, at the beginning of the chart as capital begins to be withdrawn. It shows,
initially counter-intuitively, that as more money is withdrawn from the pension savings,
benefit actually increases. This effect is demonstrating that, in Pension Credit, the first
£10,000 of capital has no effect upon the benefit. The increase is caused by the fact that
the reduction in pension savings will cause a reduction in the associated notional
income so that the benefit entitlement increases.

Gareth’s paper goes on to explore equally perverse outcomes that can arise for working age pensioners and mixed age couples who have both retirement income and entitlements to benefits.

Advice needed.

It is unrealistic to expect savers to be aware of the consequences of their choices of
pension use, in the absence of accurate advice or information. Individualised financial
advice is locked in the silo of product selection, tax implications and wealth
management and largely available only to more prosperous clients.

If you have only a state pension, or other low income, and are thinking about what to
do with your modest pension savings, then you are unlikely to find holistic advice
affordably from the private sector.

Financial advisers, questioned by me at conferences and in training sessions,
consistently underestimate the levels of income at which means-tested benefits still

It is likely that, even where advisers are aware of the potential impact, there is an
assumption that benefits will not have any relevance in many cases, where they may
actually apply.

This is important, albeit for a small number of their clients, as many means-tested
benefits are poorly taken-up. Pension Credit, for example, has consistently been
unclaimed by about 40% of entitled households.

It is clearly particularly important for those unable to afford independent financial
advice. Here, there may be substantial numbers of people who make use of their
pension savings, in whatever way, while also being entitled to untaken benefits.

Their decision to make use of savings, and in what way, might be different if they were in
receipt of, or aware of entitlement to, benefits. Informing people about potential
benefit entitlement, before they have made choices about savings usage, would provide
both a better quality of life and a more informed pension choice.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to Have pension freedoms “benefited” the poor?

  1. John Mather says:

    You might delete “freedoms” from the title and ask the bigger question.

    The complexity in both pensions and the benefits systems has the same cause which is the declining productivity of the U.K.

    Over time borrowing to consume produces a poorer society and a greater divide between have and have not.

    Can any rearrangement of the deck chairs save this sinking ship?

    As for blaming advisers for the problem, the LV research suggests that those who take advice are £47,000 better off after 10 years. Advice works the rest have guidance which they plainly don’t act upon

    • £47,000 better off after 10 years? It might be a more useful illustration to compare the starting points. People who take advice will be much better off at the beginning, I suspect.

  2. Richard Chilton says:

    There is certainly an issue here. In the worst case, those on Pension Credit won’t get a single penny of net benefit for all the money they and their employer paid into a pension pot. Others will have the net benefit scaled back in a very significant way.

    Some optimisations are possible, but they often require a level of knowledge and sophistication that is beyond that of most people who will be on benefits. It is also unclear who can help them. The personal optimisations look like regulated financial advice. And the very many with pots totalling less than £20,000 will find it difficult to get financial advisers who will help them at all, never mind at an acceptable price.

    There are also some interesting considerations here. Many who will be on means tested benefits in retirement will get best value from their pension pots by taking them before retirement. In that case, they will often just be losing 15% of the money in Income Tax. If they take the money whilst they are on retired and on benefits, they may be scaling back those benefits by over 80% of the pension money they are taking. Take all your pension money whilst you can still work and have some holidays that you couldn’t afford otherwise!

  3. EugenN says:

    As an advisor, I did not refuse anyone who come to me for some financial advice. The problem is that there is no queues at our doors. Most likely financial advice for low income people is given in pubs than in our offices.

    For my part, I gave a lot of free advice along the pension credit, a lot of advice to bolster the UK State pension with NiC class 3. I was expecting that PensionWise will deliver some of this advice and guidance, but I do not have any numbers explaining what exactly PW does, apart that they have a high number of calls.

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