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Why you should care about a little-known pensions rule

Sam Brodbeck 700x450

When you were a young child, did you ever throw away the packed lunch provided by your parents, then go around scavenging tastier alternatives from fellow pupils? No? Just me then.

I can assure you this happens up and down the country every lunchtime and – believe it or not – tells us something about the benefits system. It also provides a warning about the pension freedom reforms.

Let me explain.

Last year radical government reforms gave over-55s unfettered access to their pension pots. Where previously the vast majority of people bought an annuity paying a fixed income for life, now savers are staying invested in retirement or taking cash lump sums.

Not surprisingly, many feared there would be a free-for-all and pensioners would end up on the bread line after splashing their retirement cash. Worse, some worried they would burn through their savings and then fall back on the state.

The Department for Work and Pensions (DWP) is responsible for the state pension as well as benefits such as jobseeker’s allowance, housing benefit and income support. Luckily, the DWP already had in place the so-called ‘deliberate deprivation’ rules. These are designed to stop people getting the best of both worlds: wasting pension savings that benefit from government top-ups, and then asking for a handout.

All very sensible.

The problem is, the Government won’t say how many times it has actually used the rule in relation to the pension freedoms. I submitted a Freedom of Information request to the DWP asking just that. This was blocked under an exemption that limits the cost of replying to requests to £600 a pop.

I enquired if there was any way to bring the cost down, such as asking for the figures for a single month. Again the request was rejected, with the DWP saying my request was ‘so specific’ it could think of no way to lower the cost.

An FoI expert told me the real reason could be the rule had not been used at all yet and the block was merely to mask this.

A DWP spokesman said they had used their powers under the rule, but could not say whether this was because someone had spent their pension.

Nerdy conspiracy theories aside, we need this information.

Gareth James, a technical expert at investment firm AJ Bell, notes the vast amounts of information collected on the money withdrawn as a result of the reforms by the likes of the Treasury, HMRC and City regulator the Financial Conduct Authority.

‘But where is the equivalent data from the DWP in relation to the impact on the means-tested benefits of savers?’

He warns that ordinary people are likely to be unaware of the impact of spending their pensions on things the Government does not approve of.

The situation is not helped by the introduction of the new state pension. Eventually savers with 35 years of National Insurance Contributions will pocket around £150 a week.

However, the vast majority of people retiring over the next few years will receive less – this has prompted mass confusion among the public.

Part of the plan was that people receiving the full amount will be above the benefits threshold. This means people expecting the higher amount could find themselves under the threshold without knowing.

At the same time it is not clear what the DWP deems acceptable – or not – to spend pension cash on. Will paying off a mortgage block your benefits? How about urgent medical care?

Steven Cameron, director of pensions at provider Aegon, said: ‘We don’t know how consistently the rules are applied across the country, it may be that local benefits offices approach this differently. The problem is if you publish a list of when the rule applies and when it does not, you open up the possibility of people using that to work the system, and the Government doesn’t want that either.’

The pension freedoms are still in their infancy and few people are likely to have had their benefits cut for this reason. But unless we are told, it is impossible to know if the reforms are working. If they’re not, that hurts both the people losing their benefits and the taxpayer.

This article first appeared in The Spectator.

Sam Brodbeck is head of news at Money Marketing



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There are 5 comments at the moment, we would love to hear your opinion too.

  1. Actually the deliberate deprivation rule applies to more than pensions and local authorities in addition have more potential power than HMRC. For example if they feel that assets have been deliberately squandered they won’t allow free care home for those who allegedly can’t afford to pay.

    Anyway as far as pensions are concerned those who were fortunate enough to purchase an annuity prior to Brexit don’t have much to worry about. In the slightly longer run it may well be that with rising inflation interest rate will improve and annuities will come into their own once more.

  2. I suspect that it is a tricky area for them to legislate within. Common sense says that deliberate deprivation would be evident where a person took £20,000 of their funds and, say, spent it directly on a cruise (and paying any tax due if they remember to allow for this); but what if the funds were eroded by way of an unsustainable level of ‘income’ withdrawal being taken from a fund over time, how can one define what constitutes a reasonable level of income?

    If you have a £40,000 pension pot and ‘need’ to withdraw £10,000 per year from it in order to afford to live, is this fair use of the funds and if so, who is going to analyse how the £10,000 has been spent in order to determine fairness (along with any other income)?

    The old annuity method was simple; if you hadn’t saved enough, you got a low income regardless of your needs. Drawdown is a very different animal, especially under the pension freedoms!

  3. Julian Stevens 30th June 2016 at 5:22 pm

    Steve D ~ An interesting question. Perhaps it could be addressed by stipulating that if the person has withdrawn from his fund more than the annuity that that fund could have bought (a sensible benchmark for Income DrawDown anyway), that would be deemed to be deliberate run-down.

    If he needed to draw more because he’d failed to make adequate provision during his working life then, misfortune not of his own making aside, that would have been his own fault and he would have to accept just the most basic of state benefit support.

  4. Following this logic, someone who could have saved £500 per month into a pension from age 30 but chose to holiday and buy cars etc, shouldn’t get a “handout” in retirement either. Heaven forfend if they had the temerity to smoke, drink and eat out too.

  5. Julian Stevens 5th July 2016 at 2:31 pm

    Another possibly even less well known rule is that anyone claiming means-tested benefits is obliged in law to vest without delay any pension funds for the provision of relevant benefits. If they don’t, their benefits (in theory) will be reduced by the relevant benefits that those funds could secure.

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