Changes to the UK’s pension system, introduced at the start of the 2015-16 financial year on 6 April, mean that savers now have much more freedom over how to use their funds.
Easier to access cash
It is no longer obligatory for most people to buy an annuity as it has been in the past: instead, it is significantly easier for those who reach retirement to keep their money invested in the stock market or even to withdraw cash from a pension fund to spend or invest as they wish.
But the Government has warned that people who spend their pension savings or give funds away to family members, for example, may not be able to rely on state means-tested benefits if they run out of money.
How benefits are assessed
At present, pensioners who have lower incomes can apply for benefits, such as pension credit and housing benefit, to help them pay bills and meet living expenses.
When assessing eligibility for these payments, local authorities and the Department for Work and Pensions (DWP) look at what income individuals have – from the state pension as well as from private or company pensions, for example – as well as any savings or investments.
New rules for new regime
But shortly before the changes came into effect, the DWP published information showing how it will treat benefit assessments under the new pension system.
Even if you do not use your pension to buy an annuity, officials will work out what income it would be able to generate and make their eligibility calculations on this basis.
A significant change is that if you “spend, transfer or give away any money that you take from your pension pot”, the DWP could decide that you have done so deliberately to boost your benefit entitlement.
Lower benefit entitlement
As such, you would be assessed as if you still had this money and, therefore, end up with a lower or no entitlement to state benefits.
The government already uses a similar “deprivation rule” when assessing how much people should contribute towards the cost of long-term healthcare, for example.
But it is not clear what criteria the DWP will use to decide that an individual has “deliberately” spent or given away money just to get a higher level of benefits.