People who access their money under new Pension Freedoms may be oblivious to the potentially devastating impact on their benefits – and some could lose support completely
More than 1.5million people approaching retirement age are being warned to think twice before withdrawing pension savings as it could affect their benefit payments.
Pensions expert Steve Webb said large numbers of people aged 55 and above who access their savings using new Pension Freedoms may be oblivious to the potentially devastating impact on their benefits.
Pension Freedoms allow people to flexibly access their defined contribution pots from the age of 55. They can withdraw the money or invest it into a retirement income product, however taking the money out before you reach state pension age could affect how much financial support you receive right now.
With imminent cuts to Universal Credit and the end of the furlough scheme, people may be tempted to access their pension pots to help free up some extra money for financial security.
But taking your money out of a pension would mean you have higher savings.
Under the terms of the benefit system, those with more than £16,000 in capital cannot claim Universal Credit, whilst even having just £6,000 in savings could mean you lose out on local authority help to pay for bills such as council tax.
Moreover, if you use your pension to buy a regular income through an annuity, each pound of annuity income could be deducted from your benefit salary, again, reducing your income.
The report by consultancy firm Lane Clark & Peacock found there are more than 1.5million working-age people in the 55-65 age group on benefits such as Universal Credit or Employment Support Allowance.
If any of these people take money from a pension – perhaps because they are under financial pressure – it could have an adverse impact on their current income.
Webb said these groups may unwittingly think they are improving their financial position by drawing on their pension – but could end up making themselves worse off.
LCP have designed a free tool to help savers who are on benefits calculate how much accessing their pension would affect their income.
Commenting, Peter Robertson, who conducted the research, said: “Our research has found that existing advice and guidance on how Defined Contribution pensions and state benefits fit together is not fit for purpose.
“There is a real risk that this leaves a gaping hole through which the most financially vulnerable may fall.”
Co-author Steve Webb said: “Giving people a choice about how and when to take their pension is a good thing.
“But there is no doubt that people need more help and advice about how to make the choice that is right for them. The benefits system, particularly for those of working age, was never designed with this situation in mind.
“With millions of people starting to build up modest pension pots through automatic enrolment, this issue is only going to get bigger.
“It is unreasonable to expect individual savers to understand all of this complexity, so the industry and regulators need to work together to help people make the right choices”.