Can you avoid drawing a private pension to keep your pension credit?
Have you ever heard of something called a pension credit?
It can be best described as extra money for pensioners who are looking to boost their weekly income up to a minimum amount. As an income-related benefit, this concept is made up of 2 parts - Guarantee Credit and Savings Credit.
Guarantee Credit can be used to top up your weekly income if it falls below £163 (for single people) or £248.80 (for couples). Savings Credit, on the other hand, is an extra payment open for people who have saved some money towards their retirement (like a pension).
The general assumption is that in order to keep your pension credit, you'll have to draw a private pension but is this really the case?
What are the pension credit rules?
When you claim pension credit, it falls under a means-tested benefit. The Department for Work and Pensions (DWP) will typically assess two factors when it comes to deciding if you're eligible. Firstly, how much regular income you have and secondly, how much capital you have (including the money you store in your bank accounts and other savings).
Now, the rules differ before and after the pension credit qualifying age. Before the qualifying age, any money taken out of you or your partner's pot will be taken into account during the assessment for benefits. This could be in the form of income gained from an annuity, a tax-free lump sum or an adjustable income.
After you or your partner reach the Pension Credit qualifying age, the benefits system may start to take account of your pension pot, even if nothing has been drawn from it. However, the process will be determined by whether and how you have accessed your pension.
What are the different scenarios regarding pension credit?
If you purchased an annuity and turned your pension pot into an income stream for retirement, the system will consider it like any other pension income (like one from a company pension) and will accordingly reduce the benefits you can claim.
If you haven't touched your pension pot, the DWP won't be able to force you to take the money out or turn it into income. Instead, they'll consider it the same as if you had bought an annuity and 'deem' that you're drawing that specific level of income. Why do they do this? It's to prevent people from claiming support from the taxpayer when they could be utilising their own resources to support themselves.
In other words, you don't necessarily have to draw from your private pension in order to claim pension credit. However, if you don't, the system will treat you as if you had bought an annuity.
If you do withdraw large portions of your money to store in your bank account, this will be turned into a figure for regular income. This is to ensure that people first use their own resources before claiming support from the state and, moreover, you won't be able to simply spend your pension savings on luxuries and then claim pension credit on the basis that you have nothing left. This is known as deliberately depriving yourself of capital and the DWP will treat you as if you still had the money even if it's spent.
If you’re unclear about the mechanics of pension credit or any other areas of your private pension, be sure to consult an advisor and do as much research as possible before making any rash decisions.