Gareth Morgan has , until now, been a lone voice, howling at the moon on the plight of the low paid faced with decisions on how to spend their pension pot. “Until now” means that he is now joined by three important voices, with the backing of LCP.
Steve Webb, Matt Gosden and Peter Robertson have produced a detailed paper that runs to 26 pages that can be summed up in its title
“How getting pension freedoms
wrong could cost you your benefit”.
The paper’s too long to be included on this blog but I’m publishing the “executive summary” (probably the wrong phrase as this paper is not about executives!)
The greater freedom around accessing pensions introduced in 2015 have been hugely
popular. In the last two years alone, more than a million people aged 55 or above have
accessed a pension pot in a wide variety of ways, commonly taking the full amount in
cash or going into a flexible drawdown arrangement. But there has so far been very little focus on how these pension withdrawals may interact with the means-tested benefits system.
The amount of support provided by benefits such as Universal Credit or Pension Credit is reduced where claimants have capital or have regular income coming in. In some cases, for example, where capital exceeds a certain threshold, a claimant can be entirely disqualified from benefit.
It follows from this that those who are on benefits need to think carefully before accessing their pensions and need to appreciate how the way in which they take their pension (for example as a regular income or as a lump sum) could affect their benefit. With over a million people on income related benefits in the 55-65 age group alone, this could clearly be a significant issue.
Yet there is remarkably little help or support for people in making these choices. At this report shows, the benefits system is highly complex including:
• Different rules for those above and below pension age
• Different rules across different benefits in how income and capital are treated
• Differences from one local authority to the next
Scheme members are unlikely to be able to find information on these issues from their pension scheme or provider and even official ‘guidance’ sources such as Pension Wise generally signpost people away to potentially complex benefit calculator sites. It can be very hard for individual members to obtain factual information about the consequences of different ways of accessing their pension pots, and even harder to know the best thing to do.
This is especially true when those who are on benefit are also in debt and need to understand whether using pension balances to clear debts would be advisable or not.
This paper argues that this situation has to change. With growing numbers of people taking advantage of pension freedoms, the interactions with means-tested benefits will become steadily more apparent. Members may even challenge providers or schemes who allowed them to take their pension in a way that proved financially detrimental without offering any warning or support.
It is time for the industry, regulators and government to be proactive in tackling this issue before it becomes a new pensions scandal.
LCP has teamed up with Matt and Peter’s Engage Smarter software and published a calculator that tells you the impact of drawing down from your pension pot if you are receiving either universal or pension credit.
It’s in the spirit of the work they started with state pension entitlements and suggests that LCP are looking to push the boundaries of conventional pension consulting into pro-bono work for the financially excluded.
The result is the ES-LCP benefit website which can be accessed by this link or from https://www.pensions-and-benefits.uk/
I tried it out with a friend who was with me yesterday. This is the dispiriting finding for her plan to draw £120 pm as an UFPLS from her pension pot led to her losing all her universal credit.
This was news to her.
But it can be so much more difficult than that. This table, taken from the Gosden, Robertson Webb paper shows what people likely to be drawing benefits are actually doing with their pension pots.
This table shows the kind of things that happen when you start withdrawing money from your pension pot to buy an annuity, drawdown or cash-out.
And this is the conclusion the paper reaches on one hypothetical case study
This simple example shows the huge difference in outcomes for someone on the main working age benefit depending on how they exercise their pension freedoms. At one extreme, taking a small lump sum and leaving the rest can be done relatively safely and with no short-term impact on benefits. At the other, someone making the most popular choice with their pension – cashing it out in full – could wipe out their entire Universal Credit, whilst someone buying an annuity could see every pound clawed back in reduced benefit.
This is the message Gareth has been banging on about and I’m glad the narrative is now coming from other sources. LCP has now posted the full paper to its website and it can be accessed from this link
Thank you for highlighting these issues. I was led to Gareth’s exposition by a link from one of your previous posts. This is a widespread issue. For the pension-self-reliant self-employed, misdirected, misled and missold in the past decades, and consequently fearful of all financial advisers (not to mention not trusting dolphins), this is another barrier in the way of post-work bliss. For those in employer schemes, who have a right to put their faith in trustees, it could come as a very rude awakening should they make the wrong choice on the one occasion when they do have to make that important decision. My personal experience of Pensionwise advice is six years out of date. I hope it’s improved since then. Apart from the obvious (cash out, annuity, regular/irregular drawdown), all I really got was a caution to avoid sipps.
I don’t know if the full paper covers it, but there can be an issue for those who aren’t on benefits now but will be once they retire and are over state pension age. They can get far more net value from their pension pot by taking the money whilst still working than they ever could by keeping it until retirement. Have a good time now as retirement will be frugal whatever you do!
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