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Govt confirms undrawn pensions out of debt collectors’ reach

Untouched pension savings cannot be taken into account by insolvency practitioners and debt advisers, the Government has confirmed.

There has been growing uncertainty over how pensions should be treated following the pension reforms, which mean anyone aged 55 and over can take their entire pot as cash.

In addition, two court cases had delivered conflicting decisions on whether bankrupt savers should be forced to crystallise their pension to pay creditors.

However, the Government’s guidance says undrawn pension funds should not be used in any calculation for an income payments order or income payments agreement.

Likewise, intermediaries in debt relief orders should not consider untouched pensions in the calculation of income.

It says only pensions which are in payment should be used for calculations or in debt relief order proceedings.

The Department for Work and Pensions has also issued a note on how the pension flexibilities interact with means-tested benefits.

In January, Money Marketing revealed concerns people could lose benefits if they accessed their pensions after 6 April.

In the note published today, the Government says: “If you spend, transfer or give away any money that you take from your pension pot, 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.”

MGM Advantage pensions technical director Andrew Tully says: “The DWP could not be any clearer in how they will treat cases where people have either deliberately or unwittingly spent their pension pots and intend to fall back on means-tested state benefits.

“We have a duty as an industry to make it very clear what the consequences of this are. But all of the responsibility rests with the individual to tell DWP and the local authority when they take money from a pension.”

However, ex-Which? financials services team leader Dominic Lindley says further clarity is needed.

He says: “It is still not clear what the distinction is between income and capital withdrawals from your pension – when does taking a series of irregular lump sums become income?

“It still seems complicated and it’s not clear whether Pensions Wise will be able to advise people on the difference.”


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There are 3 comments at the moment, we would love to hear your opinion too.

  1. This is a welcome clarification and a reminder to consumers that with access comes responsibility!

  2. It’s very clear when income becomes capital for capital becomes income. As in the law relating to deprivation, these rules have not changed even if they may be new to some commentators.

    Income is treated as income for the period for which it is paid. Any unspent income will become treated as capital after that period. There are specific rules, particularly for equity release, where capital can be treated as income where it is regularly paid. This is why it is better, if somebody wishes to release capital for day-to-day living expenses, for them to draw it down in irregular amounts and at irregular periods. In that way the capital is treated as capital and is subject to the more generous disregards which applied to that.

    Deprivation is a more complex issue and one with judgement needs to be applied.

    When deciding whether somebody has deprived themselves of income or capital, for benefit purposes, then there are a few factors that need to be considered. The most important one is whether the person is aware that disposing of their funds, in any way, will entitle them to more benefit. If that isn’t the case then deprivation for benefit purposes cannot have occurred. Even where they are aware of that then the decision has to have had, as a significant motive but not necessarily the only one, the aim of acquiring or increasing entitlement to benefit.

    As the rules haven’t changed then the process of deciding how much income somebody could receive from their pension pot, if they choose not to take it after reaching pension credit age, is also the same. That means there is a legal duty on the pension fund to carry out a calculation using the GAD tables to determine the maximum amount but somebody could receive. I wonder whether much consideration has been given to how many more of those calculations there may be under the new freedoms.

  3. Of course the biggest insolvency practitioner and debt collector is in fact the Government! What about local authorities and the assessment of both capital and income for the purposes of care fees? I cannot see this asset being ignored and then passed intact to the next generation merely because the person in care or family members deem it inappropriate to either take income or capital.

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