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.”