Simon Read: 'Loophole closes on pension freedom and welfare payments'
One reader pointed out that he could cash in his small annuity and have the income replaced through pension credits. The DWP is set to close the loophole
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Your support makes all the difference.Yesterday the Department for Work and Pensions (DWP) issued a factsheet highlighting the qualification rules for means-tested welfare payments in the context of the new pension freedoms. In short, it warned that anyone on benefits could face problems if they choose to take all the cash out of their pension pot.
I wrote recently about the risk of people spending all their retirement savings – or cashing in their annuity when new rules allowing them do so come into force in April 2016. I pointed out that it could lead to a spate of people simply spending the money on holidays, or passing it on to their children, and then falling back on the state to support them.
One reader – Peter from Liverpool – had phoned me to raise the issue, pointing out that from next year he could cash in his small annuity and have the income replaced through pension credits.
Now it looks as if the DWP will close the particular loophole. Under the so-called "deprivation rule", if you spend, transfer or give away any money that you take from your pension pot, the DWP will consider whether you have deliberately deprived yourself of that money in order to secure (or increase) your entitlement to benefits.
If it is decided that you have deliberately deprived yourself, you will be treated as still having that money and it will be taken into account as income or capital when your benefit entitlement is worked out. In other words, welfare payments will be cut.
Tom McPhail, head of pensions research at the adviser Hargreaves Lansdown, said: "There is a risk if too many people with modest private savings spend all their money, the DWP could end up with a spiralling welfare liability. The new freedoms are going to be very popular, but pension investors still need to take measured and well-informed decisions about how they use their retirement savings."
The guidance suggests that eligibility for a range of welfare payments could be affected by private savings, including housing benefit, Jobseeker's Allowance, income support and pension credit.
s.read@independent.co.uk
Twitter: @simonnread
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