Will pension changes restrict benefits to the over 60s?
There has been a flurry of changes to pensions since the March Budget, ranging from no longer needing to purchase an annuity to being able to remove money from your pension at will. One of the main pieces of news was that from the age of 55, people will be able to withdraw their entire pension pot - subject to tax - and do what they want with it. This has been praised and criticised, but what has been overlooked is the potential for this change to restrict benefits to the over 60s - whether or not they are taking money from their pension.
Current legislation states that a person is considered to have a notional income if they are at state retirement age and are "entitled to money purchase benefits under a personal pension or occupational pension scheme that does not allow income withdrawal" or have "a retirement annuity contract and [have] not bought an annuity".
The level of notional income is based on how much the person can access: "The amount of notional income is the amount that a person could have received without buying an annuity, if the pension funds or retirement annuity contract were held in a scheme that did allow withdrawal".
The government considers notional income from the age of 60.
Essentially, when a person reaches their 60th birthday the government considers the money they would receive if they took the maximum income drawdown from the pension fund, even if they are not yet receiving it. However, from April 2015 the maximum will be the whole fund.
Unless there is a legislative change, in six months the government could view a pension fund in the same way as a savings fund and withhold benefit payments to the over 60s until they have exhausted their pension. For example, if a person has a fund of £60,000, that full sum will be the basis for means testing rather than how much they would secure with income drawdown. Currently, taking a monthly income may reduce the benefits to compensate for those earnings; when a lump sum is viewed in its entirety, it can remove people from eligibility of means tested benefits completely.
Despite all the assertions that the changes are offering people the chance to look after their own money - which is true - there's a very real danger that people in need will be denied certain benefits, worsening their financial security. The pension freedoms have a lot of positive aspects, but the worry with this is people being forced to exhaust their pension fund, leaving them entirely at the mercy of the state - the opposite of financial freedom.
A policy to deny Universal Credit to people with a pension pot seems unlikely to be deliberately made, and is possibly just a conflicting overlap between old and new rules. However, to avoid further confusion and potential disruption to people's finances, an official statement is needed to clarify what will happen next year.
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