Originally published by Gareth Morgan on August 9, 2022 here.
There’s been some discussion recently about the use of pension savings, after the age of 55, to help meet the cost of living increases that are affecting many people. You can see some of this discussion on Henry Tappers blog about pensions (a highly recommended read): The cost of living crisis – and the value of small pots | AgeWage: Making your money work as hard as you do (henrytapper.com) and following, where I’ve added some comments.
There are a few issues which deserve some further consideration here and I’ll touch specifically on two of them :
- The effect of inflation and the double hit on pensioners; why it can make them worse off in absolute cash terms
- Deprivation rules on using pension savings
Inflation and the inverse benefits problem
Inflation is bad news for those on benefits, as it always has been. Although there are, at least semi-automatic, ways in which benefit rates increase to take account of inflation, there is always a substantial lag. There is no retrospective way to help people who have faced the impact of higher costs to be met from un-indexed benefit payments. Any increase is always after the fact.
Pensioners can face a second problem caused by inflation. Notional income from pension savings. Where pensioners have untaken savings in their pension pots then this will generate a notional income. That reduces Pension Credit and, other benefits including Housing Benefit and Council Tax Reduction. This will apply particularly to pensioners who are drawing down their savings, regularly or irregularly, during retirement. Those with annuities or, typically, in Direct Benefit schemes are not affected by this rule.
The amount of notional income is calculated using the GAD tables. These tables produced by the Government Actuaries Department provide an annual notional income per £1000, determined by age and by the 15 year gilt yield. …and there’s the problem.
Gilts are government bonds and they are particularly sensitive to interest rate changes. They are issued by the UK government and they pay a fixed interest, or coupon, rate at fixed periods. When issued they tend to start at the current market interest rate. Gilt prices go up when interest rates fall, and go down when base interest rate goes up. So gilt yields rise and fall with interest rates.
As gilt yields rise, when prices fall, then the GAD table reflects that in an increased notional return. Here, in Chart 1, you can see the change over the last 5 years in the yields, since the GAD table was last changed.
While it looks a little fuzzy, because of frequent daily small changes, it shows that the rate changes frequently and substantially. Over the 5 years, the lowest rate is 0.304% and the highest is 2.906%. There’s some rounding applied when working out notional incomes but the variation in rates does create noticeable differences in value.
Here in Chart 2, is the resultant notional income over the same period for a 70 year old with £20,000 of untaken savings.
The maximum notional income over the period was £116.67 while the minimum was £86.67; that’s a variation of 29%. At the time of writing, we’re close to the highest end.
The effect, in benefit entitlement, of the variation is simple – at the lowest yield rate benefit would be £30 a month higher than it would be the highest yield rate.
Boiling it down, people face a rather contrarian result that as inflation rises their benefit is likely to fall. As inflation rises steeply, so will their benefit fall steeply.
There is a quirk in the system which can mean taking some money from savings and hanging onto it can be worthwhile. You can hold up to £10,000 without affecting benefits entitlement. Take £9,999 from pension savings by drawdown and that doesn’t alter any benefits entitlement. It does reduce your savings, reduce notional income and thus increase benefits entitlement. On today’s Gilt rates that would increase monthly Pension Credit by £53.33.
Moving onto deprivation, the DWP have commented that people should be cautious about taking money from their pension savings to meet immediate needs as they might fall foul of rules concerning ‘deprivation’.
It might be useful to have a bit of detail about how deprivation rules work. They’re designed to stop people disposing of money that they might otherwise use to maintain themselves, and then turning to the state for support instead. They kick in when the disposal either creates an entitlement to benefit or increases the amount of entitlement. They’ve been around for a long time and for eminently sensible reasons.
If you win the lottery this week, give it all to the kids and then claim benefit to enable you to eat and clothe yourself, it’ seems reasonable to say that’s unfair. The consequence of having been found to have deprived yourself is to be treated, in the benefit assessment, as if you still have the money. There is a complex set of rules that diminishes that amount over time so that you can become entitled to the benefit again in due course.
To be treated as having deprived yourself, the intention to qualify for benefit has to be there. If you don’t know that will be the effect, then you can’t have got rid of the cash in order to qualify. It doesn’t have to be the sole reason you got rid of the cash but it does have to be a ‘significant operative purpose’. The messages in Henry Tapper’s blog on spending to qualify would almost certainly be a strong pointer to this.
Whether taking pension savings and spending them, on daily living costs or meeting a financial crisis, raises some points. Where there is a balance of reasons for the spend, then the DWP and any appeals process, should consider that balance. Typically giving money to the kids, or blowing it on a world cruise, would be considered to be spending money that you could reasonably have spent on day to day expenses, and hence deprivation. Paying off a debt that would otherwise have lost you your home wouldn’t. Moving the money into a different form, such as buying an asset, isn’t normally deprivation as you still have the value.
Taking pension savings before pension age is, in itself, an interesting technical point. The value of pension savings is ignored, for benefit purposes, before pension age. It only counts when it appears in your possession as capital or income. If the money never passes through your hands, there is an argument that it can never count, but that has failed in the past. If the money taken as capital, never means that you have more than £6,000 at any time then it’s ignored for benefit purposes. Taking a series of sums and spending them so that your capital remains below that level at all times is safe in those terms.
Whether you can spend pension savings before pension age and then get Pension Credit or more Pension Credit is a test that has not, as far as I’m aware having searched Ferret’s Social Security Law Electronic Database, been tested and determined. Local authorities do look back, often over many years, to operate a similar test when assessing social care charging rules but those don’t create a precedent. Can you, perhaps many years earlier, at a time when there is no entitlement to Pension Credit, spend money, which is not at the time relevant to any benefits entitlement, be depriving yourself? There would be great difficulties in proving that, normally. If the main reason why you did that was to meet real and immediate needs, I would be very surprised if the rule applied.
If you’re already over pension age, the the same rule can apply, but there is an immediate possible entitlement to consider. Again, taking the money and giving it away, knowing that it would affect benefit, is likely to be deprivation. Spending it on real needs is unlikely to count, even if you realise that it will have that effect.
We know that we are all facing increases in costs and consequently inflation. For some people that will be annoying; for others it is disastrous. Helping people to find ways to deal with or mitigate their situation is crucial, especially if, as seems likely, the next administration is determined to avoid handouts or to remove resources from the areas most in need. While making use of pension savings will not be the best for the long term, it may be better than, as has been suggested by a former pensions minister, maxing out their credit cards.
Understanding the consequences, and potential costs, is part of, as always, making an informed decision. This is not easy in this difficult area and it’s not helped by the, sometimes contrarian and always complex rules which apply.
I really do believe it is not right to encourage people over 55 to raid their pensions at such a young age, to meet immeidate living costs for a whole host of reasons.
Firstly, this cannot help the under 55s, so measures are needed for them anyway and raiding pensions now would not work for most of the poorest.
It is not clear that this crisis will last for many years, despite the doom and gloom fearmongering that is bombarding us from so many sources, because these kinds of price rises are unsustainable. I do hope that the Government will – sooner rather than later – realise we need to stop the price rises, rather than doling out more public money which seems never to satisfy anyone. The energy market is broken, companies are pushing up prices and not bringing them down again when market prices fall. Gas may be expensive due to supply issues, but electricity and renewables are not seeing such price rises and the cost of petrol could be cut significantly by a temporary suspension of fuel duty. These actions, reducing costs directly for consumers, would have much more positive side effects too – reducing cpi, taking pressure off wage rises and helping businesses costs too. And this would mean people would no longer need to feel forced to strip themselves of pension savings that could be building up to sustain them over future decades. This itself could lead to more pensioner poverty and inequality.
Of course, if people are no longer working due to ill health, and other benefits are not sufficient, while short term borrowing is not an option, then will seem tempting but many will still be working and those who are not working and have very low incomes are least likely to have a pension fund anyway. We need better info of course.
Ros, with regards the comments on political behavior, I have nothing to add, it is the BOE who manage inflation and the various bungs that come from the Treasury are incidental to the man event which is that gas and electricity alone are going to eat up over half the state pension over the next year. We had another homjily today from Canada Life, reminding us of the perils of taking pensions “early”. Restrictions such as the MPAA are meaningless to the low earner – chance would be a fine thing for low erners to see more than £4,000 pa flowing into a pension. Tax too is cited as an issue for those withdrawing saving, emergency taxation especially. Most people drawing on saving at this time will not pay tax on the withdrawls, either because of PCLS or because thy have headroom within their persona allowance. Where tax is payable , it will be at 20% and because the withdrawl is meaning taxable income exceeds more than £12,750 this year. Again, most people in dire poverty are exiting on jobsekkers allowance + housing benefits. There are nearly a million people over 50 classing themselves too sick to work and out of the labour market – these are the people who are in danger of absolute poverty and most of them have very small pension pots. The suggestion that private pensions will ever form a meaningful part of such people’s post retirement finances is fanciful. As Steve Webb has been saying for some time , it is State Pension +Pension Credit + Housing Benefit that matters. Auto-enrolment will deliver meaningful income to subsequent generations (so long as they stay in) but it arrived too late for those in their late 50s and 60s who never saved before. These people have – at best – a chance of bridging till SPA and using the small capital allowance that Universal Credit gives them, to pay their household bills over the next 24 months. If the money is gone by then, at least they will not have been cut off or maxed the cards or facing housing arrears – or worse – the payday loan enforcers.
I really do think you need to have some proper data because the number of over 55s you are talking about is probably really tiny and many of them would be better off going to Citizens Advice or MoneyHelper to help them reschedule their debts, debt forgiveness or other assistance that can tide them over. If they are really disabled, they will be on disability benefits. Those who have chosen early retirement often have other savings or live with someone else who does.
Pensions should be the last money you spend, not what is turned to when still relatively young.
The people for whom your recommendation will apply should go to MoneyHelper or CAB first, to explore other options but I fear encouraging them to just take money out and not worry about whether this is right for them will undermine many people’s futures. Many over 50s will have income over £12,570 and lose around 15% if they cash their whole small pot. Pensions are precious. The money that employers and taxpayers have put into people’s pensions is meant to last a lifetime. Many people cash in their pensions just because they can. Encouraging more to do so, without carefully considering first whether this is right (and of course deliberate deprivation rules or means-testing traps) seems not the best option
someone does not have long to live (how many?)
has no other source of money (how many of those with pensions?)
has no prospect of working again even part-time
has exhausted all other options.
People need help and we need more data before making bold conclusions. Fuel bills will be reaching a cap of around £355 a month next year, but someone getting the £400 or even full £1200 already – with potentially more help before those increases happen – has had some help
I would rather that Government directly reduces people’s bills, e.g. limit the cap increase with price control and timetable, reduce fuel and energy taxes for a temporary period, address standing charges which penalise those living alone etc. etc.
According to DWP fugures on stat-xplore, 2019 – 2020 figures for incomes below 60% of absolute median (which means low, low, low) are
Pensioners 1.48 million
Working age 6.78 million
Disability benefits are probably only going to below half of people entitled and do not often meet necessary extra costs of disability.
As for “ reschedule their debts, debt forgiveness or other assistance that can tide them over”, I’ll be very happy to introduce you to some money advisors who could explain the real situation that people face.
According to ONS , 55% of adults do not save into pensions, of those that do, we have evidence from ONS that a high proportion of pots are never going to make a material difference to people’s retirement income. See my blog this am https://wp.me/ppXQz-s1l . As Gareth is saying, the problems with poverty are much wider than you suggest and – as Steve Webb has shown, the amounts in private pensions for those who have been first time saving through AE are not sufficient to make a material difference over a remaining lifetime. Your arguments Ros are grounded in ideology not reality, but the reality of 2022 is brutal. We need to provide practical assistance now.
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