What happens if you use the new pension freedoms to withdraw all your savings from your pot and you then spend the lot? Can you then settle down with your memories of your happy splurge to a later life living on benefits? For those with relatively small pots, this might have been looking like a pretty good idea.
Why take say £1,000 a year from a £16,000 pot when you could take out the lot, go on a luxury cruise, and get then that £1,000 a year made up from housing benefit or some such?
The good news (for taxpayers) if not for the profligate is that this isn’t going to be possible. The last thing the government wants is pension freedom for individuals turning into a spiralling welfare liability for the state.
So they have released a firm fact sheet on the matter. You can read the fact sheet here, but the key point is that after retirement age, you are “expected to use your pensions to help support yourself.”
If you haven’t used it to buy an annuity, an “amount of notional income” will be assumed from your pension and that will be taken into account when your benefits are being calculated.
If you take more than that as income, the higher of the two numbers will be used when calculating income-related benefits. If you take significantly more and spend it in such a way that you are considered “to have deliberately deprived yourself of that money in order to secure your entitlement to benefits*”, you will be treated as though you still have the money and your benefits will be calculated accordingly.
So that would seem to be that: spend your pension irresponsibly and you could end up having a deeply miserable old age – the government isn’t planning to let the welfare state bail you out. However there are – as ever – a few loopholes knocking around here.
The first is over capital and income. As far as I can see from the factsheet, “if you take a cash lump sum” this will be taken into account as capital. The rules on capital are more generous than those on income for benefits purposes, so this could allow some to take more than the notional amount mentioned above annually and still have benefits assessed on the notional amount.
It is also worth noting that the law on deprivation applies only in the case of deliberate deprivation. Those who don’t understand the rules presumably can’t be guilty of deliberate deprivation. That rather suggests a higher welfare bill post pensions freedom that the government is yet ready to permit.
* This rule isn’t new – but its application to pensions law has been clarified by the new fact sheet.