If you are going on a spending spree with your pension cash, watch where the money goes, or you could be in trouble.
Anyone who the government believes deliberately spends their pension money and then claims benefits could find they are breaking some special rules.
The technical term is deprivation, and anyone who deliberately spends their pension and goes on to claim benefits may find they do not qualify for extra cash.
Even if you leave your pension untouched, you are treated as receiving a notional income from the capital.
If you spent some money from the pot that would have removed or reduced an entitlement to a means-tested benefit, the Department of Work and Pensions might consider you have deliberately deprived yourself of that money.
Depriving yourself of income
If that’s the case, the DWP will treat you as still having the money and assess any benefit claims as if you had a notional income from the money.
The decision is made depending on how the money was spent.
And because the DWP refuses to make any deprivation decisions until the money is spent, pension savers find deciding if they are deliberately depriving themselves of money is almost impossible.
Take a pension saver who is ruled to have notional capital of £20,000 which has been spent.
They go on to claim pension credit and are considered to have deprived themselves of £10,000 of capital – the rest is ignored as the capital limit for claiming the benefit is £10,000.
The £10,000 generates a deemed income of £20 a week, reducing the benefit by the same amount.
Penalties can last for years
The notional capital is then reassessed every 25 weeks, reducing the notional capital by £500 and increasing the benefit paid by £1 a week.
This continues until the notional capital runs out – which takes almost a decade.
Deprivation rules are applied differently if you are of working age or reached state pension age.
For example, a pension saver drawing cash from their pot to repay a loan and leave savings below the £10,000 limit is considered reasonable.
But if the same taxpayer took pension cash to repay a loan and spent a few thousand on a lavish holiday could find they are falling foul of the deprivation rules.
The rule of thumb is always keep receipts to show how you have spent pension cash if your financial circumstances mean you may have to claim benefits to make ends meet. The rule applies to anyone aged 55 or over.