Savers who spend all their pension pot should not expect to be able to rely on means-tested state benefits, the Department for Work and Pensions (DWP) has warned.
A fact sheet issued by the DWP warns that should savers cash in their pension pot as a lump payment and either spend, transfer, or give it all away they will be treated as still having that money for benefit entitlement purposes.
From today (6 April 2015) savers will be allowed to cash in the their pension pot or put the money into ‘drawdown’ and 25% will be tax free. This is otherwise known as an ‘uncrystallised funds pension lump sum’ or UFPLS.
Pension savers can take one or more UFPLS payments and these can be regular or irregular payments.
Other options also exist, details of which can be found here.
However, the DWP fact sheet reads: “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 means-tested 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.”
Andrew Tully, pensions technical director of MGM Advantage, told New Model Adviser: “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.
“It seems clear to me people need to pause before raiding their pensions [this month] and ensure they fully understand what the potential long-term consequences of doing so are.”